A call for sales tax on cars and gasoline

REUTERS/Max Rossi
Taxing gas would allow us to reduce the overall sales tax rate by MN sales tax by anywhere between 0.8% and 1.6%.
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No, I’m not joking. David Levinson wrote about an often overlooked but important subsidy* given to drivers: the lack of sales tax on gasoline and auto/truck purchases. I’m surprised this hasn’t received more attention given the other distortions that see press. Yes, we pay a motor vehicle sales tax when buying a car, but that is supposed to be a user fee for funding roads (well, 60% of it at least). Yes, we also pay state and federal gas taxes, but again those are user fees (the MN gas tax is 100% dedicated to the Highway User Tax Distribution Fund).

*The word subsidy is often used when no direct subsidy is actually taking place. In this instance, like the mortgage interest deduction or similar policies, the lack of payment acts as a price distortion given lack of exemption for most other goods purchased. It’s not a subsidy per se, but the term works good enough.

We pay sales taxes on windshield wiper fluid, oil, tires, parts, and other necessities to keep our cars moving. We also pay a sales tax on refrigerators, stoves, lights, and thousands of other durable goods (and other not so durable ones) to live a modern life. Cars and gas shouldn’t be any different (in the author’s humble opinion).

Let’s evaluate what this would mean under politically possible scenarios. What do I mean by “politically possible”? Well, it’s very unlikely that we’ll see a statewide increase in total sales tax collected. Not only is the sales tax one of the more regressive taxes around (making it unpopular with liberals), raising taxes (on cars and gas, specifically) would not go over well with conservatives. So, I’ll limit my analysis to revenue-neutral only.

Source: ITEP
Nothing political here. Sales taxes are a much higher burden on lower income families.

For my analysis, I will be referencing the current gas tax ($0.285/gal, assumed across all gallons sold – an incorrect but rough estimate) and MVST Rate (6.5%), gas tax, general sales tax and MVST revenue collected by the state in 2013, a rough estimate on 2013 average gas price of $3.20/gal taken from here, spending information from the 2013 BLS Consumer Spending report, and number of MN Households. Again, in all scenarios I hold total revenue collected constant, otherwise we’ll get into a debate on if the current amount raised is too high/low and if the programs the money goes to are necessary. Also, when I say “add a sales tax to MVST,” I am proposing keeping the current 6.5% as a user fee (we need a dedicated funding source for roads) and the resulting general sales tax rate would be on top of that.

Scenario 1) We add a sales tax to gasoline and motor vehicle sales, apply a lower rate to all goods.

Scenario 2) We add a sales tax to gasoline sales only, apply a lower rate to all goods. Why? 3 million Minnesota residents live within roughly an hour drive of Wisconsin. If a family only buys a car every 4-5 years, they’ll likely make the trip across the border.

Scenario 3) We add a sales tax to gasoline, motor vehicles, and clothing. I know, taxing clothing seems extremely regressive, since it’s basically a requirement to survive. I’m just testing the waters here to see how the numbers shake out, and since clothing only represents roughly 3-3.5% of household spend for families making less than $40,000 per year. That share is roughly the same as higher income households (making >$70k), who also spend 3.1%. Compare that to groceries, where lower income households spend around 11% of their income, while higher income families spend more like 6-8%.

Scenario 4) We add a sales tax to gasoline and clothing, but forego vehicle sales, apply a lower rate to all goods.

Here’s the outcome:

We see that we can reduce the general burden on the MN sales tax by anywhere between 0.8% and 1.6% with these four scenarios. I’m inclined to suggest Scenario 1 — as a state, we shouldn’t favor the purchase of automobiles over other consumer spending by under-taxing it. Clothing is a pretty small household expenditure (clothing spend in low income households is half that of just gasoline, for example), but pragmatically, this will never fly in a fairly progressive Minnesota (and one where a certain mall will lobby hard to keep visitors coming to buy their wares on the cheap). The net result for an average Minnesota family/individual would be no additional tax burden. If you buy a lot of cars and drive a lot, you will likely pay more in total sales tax. If you own fewer cars and/or drive less, you’ll pay less.

Yes, Wisconsin or North Dakota may say they’re “open for purchase” or something similar, that’s fine. We could make it a requirement to pay the sales tax when registering a vehicle purchased outside the state to avoid this behavior; presumably, nearly all cars bought in Wisconsin acquire new MN titles, no? We used to dedicate a significant chunk of the MVST to the general fund — as recently as 2002, 69.14% was sent to the general fund, with years prior to 1980 seeing none dedicated to transportation. My guess is the DOT and state began realizing that gas taxes alone weren’t covering system maintenance and expansion so they began searching for ways to pay for roads. Fine, keep the MVST as a user fee (though I disagree with using fixed costs like these instead of mileage– or congestion-based ones), but lower the sales tax burden on everything else we all buy.

This post was written by Alex Cecchini and originally published on streets.mn. Follow streets.mn on Twitter: @streetsmn.

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Comments (19)

  1. Submitted by Jim Harvey on 11/25/2014 - 10:03 am.

    No more taxes. It’s time these federal and state junkies started cutting the size and scope of government. The government is non-essential and should be allowed to take only a certain percent of income OR consumption not both. The 16th amendment needs to be repealed and then we can deal with the states on the issue. The 16th amendment was deemed passed in much the same way the Obamacare was, through seedy methods by political insiders.

    • Submitted by Dan Landherr on 11/25/2014 - 10:43 am.

      Cutting government

      Since we’re talking about motor vehicle taxes I guess we should start with closing the road outside your house.

    • Submitted by Joe Smithers on 11/25/2014 - 11:38 am.

      non-essential

      Government is non-essential? I guess you are on your own when you build your house without any building code and get sued when someone trips down your steps and hurts themselves or when you kill someone on the highway going to fast or any other numerous things. Just about the most extremist view I’ve read on MinnPost. There are many essential services the government provides that are to numerous to list here but even just a seconds thought would get one or two.

    • Submitted by Alex Cecchini on 11/25/2014 - 03:11 pm.

      Not more taxes

      The proposal is adding what products are included in the sales tax, but lowering the rate. The State of Minnesota would not take in any additional revenue than it does today.

  2. Submitted by Joe Smithers on 11/25/2014 - 11:12 am.

    Is he forgetting something?

    Is he forgetting where taxes currently go? When you lower taxes on everything else something will obviously suffer. I think he may be failing to realize that in an effort to get what he thinks is important (roads).

    • Submitted by Alex Cecchini on 11/25/2014 - 03:10 pm.

      This isn’t about roads

      I realize this may not come across very clearly. We have a funding system for roads (MVST and gas tax, both of which are actually user fees rather than “taxes”). I’m saying that for political reasons, cars and gasoline do not have a sales tax added that goes to the general fund. A car is no different than a boat, ATV, construction equipment, or any other large item costing thousands of dollars, yet all of those fall under a general sales tax. Similarly, oil, windshield wiper fluid, car parts, etc also have a sales tax, yet gasoline doesn’t.

      I’m advocating that we add a sales tax to cars and gas that goes to the general fund, but lower the overall rate. The same amount of revenue would be collected across the board, but the rate would be less burdensome because the base (the total sales taxable dollars spent) is broadened.

      Thus, instead of spending 6.875% on sales tax when you buy a DVD or toy for your kid, you spend 5.48% (or whatever the scenario dictates), but you also spend an extra 5.48% on gas. The average family spends the same, but those who drive more and own more cars pay a little more, those who drive less pay a little less.

  3. Submitted by John Peschken on 11/25/2014 - 12:21 pm.

    Why not the gas tax?

    Why the phobia about raising the gas tax? Politicians treat it like it’s poison for some reason.

    Revenues would be a lot more predictable than sales tax. Sales tax revenues would rise and fall wildly with the price of gas.

    All this nonsense about tracking miles traveled in cars is just silly too. If you drive a more fuel efficient vehicle, I don’t see a problem with getting by paying less in gas tax. Smaller lighter vehicles do less damage to the roads. We want to reward that.

    Just raise the gas tax. Simple, easy, and fair.

    • Submitted by Alex Cecchini on 11/25/2014 - 03:22 pm.

      Response

      This post isn’t about gas taxes or fuel wholesale taxes (as MoveMN proposed) for highway funding. It’s about extending the sales tax to gas and cars for the general fund.

      However, to address your comments re: road funding…

      Yes, a sales tax on gas would be less predictable than the current gas tax (per gallon). But that doesn’t make it optimal. A gas tax (per gallon) as user fee assumes a mile traveled for one vehicle is equivalent to another. They’re not:
      – Vehicles have different fuel efficiency, so one gallon may mean 20 miles for one car and 40 for another.
      – Vehicles weigh different amounts, their wear/tear on the roads based on weight doesn’t track exactly with gallons used
      – Vehicles use certain roads at certain times of the day. We build a road system based on a general slush fund of gas taxes (and MVST) to handle peak demand. If more roads charged congestion fees for time of use, we would smooth demand out better and need less capacity. Gas taxes don’t tackle this.
      – Gas taxes don’t accommodate electric vehicle fleet transition. 10 years ago this may have seemed like a silly point, but looking forward 10-15 years, it’s not outrageous to think a decent chunk of vehicles on MN roads will be powered solely by electricity.

      Yes, gas taxes are good motivators for fuel efficient vehicles (I would say long-term the gas tax should be used more as a carbon tax, charging the equivalent of $40-50/ton in $2012, but that’s a topic for later). But encouraging fuel efficiency is only one of the goals the DOT and State should be going for. After all, they have thousands of lane miles to maintain and finding an efficient and fair way to charge users for it should be just as important.

      • Submitted by Todd Hintz on 11/25/2014 - 05:01 pm.

        Gas Tax

        John’s post sounds reasonable to me. If someone is using a lighter or more fuel efficient vehicle, then they should indeed be rewarded for their thriftiness. While it’s true that in a number of years there will be somewhat more electric cars on the road, the way the industry looks now. There’s no point in delaying changes that are immediately needed because they might be a significant portion of the auto sales mix thirty years from now.

        Congestion taxes are also a great idea. I don’t see any reason why we can’t implement both ideas. This isn’t an either/or situation. And, in fact, it may take all ideas on the table to get our roads back in shape.

      • Submitted by John Peschken on 12/02/2014 - 02:57 pm.

        The post is about how we raise money for transportation.

        My comment was simply to ask why gas tax never seems to be part of the conversation any more.

        So, I think I was on topic.

      • Submitted by John Peschken on 12/02/2014 - 03:06 pm.

        – Vehicles have different fuel efficiency, so one gallon may mean 20 miles for one car and 40 for another.

        The 20 MPG vehicle weighs more and causes more wear and tear.

        – Vehicles weigh different amounts, their wear/tear on the roads based on weight doesn’t track exactly with gallons used

        Not exactly, but it’s close.

        – Vehicles use certain roads at certain times of the day. Gas taxes don’t tackle this.

        A fair point.

        – Gas taxes don’t accommodate electric vehicle fleet transition.

        Electric vehicles are pretty insignificant now. Maybe the mileage tax is for electrics only. The rest pay through gas tax.

        Then figure in the costs of collecting all the mileage, peak usage fees, etc. Am I really going to have another section on my state income tax form where I adjust this for my net income minus line 23b unless I live out state or some such nonsense? Bah. Hate it.

        Just bump the tax.

  4. Submitted by Thomas Swift on 11/25/2014 - 02:03 pm.

    I’m in agreement. The only option for Minnesota is to raise gas taxes, raise ’em high and keep raising them.

  5. Submitted by Steve Rose on 11/26/2014 - 06:09 pm.

    6.5%

    That is the Minnesota Vehicle Sales Tax rate.

    Who’s purchasing cars sans sales tax?

    • Submitted by Alex Cecchini on 12/01/2014 - 02:04 pm.

      Yes.

      Noted in the post. 6.5% MVST. But this is not a sales tax in the same way our 6.875% statewide sales tax is. It is a motor vehicles sales user fee, since the funds go directly to roads instead of the general fund (which funds all aspects of gov’t including education, health, etc). It should be seen more like a county wheelage fee or MnPass toll than a sales tax.

      I’m saying we should broaden the sales tax to include motor vehicle sales.

      • Submitted by Steve Rose on 12/02/2014 - 07:15 am.

        Back in 2007, the biggest destination for the MVST was the general fund; since 2007, the money has transitioned from the general fund to the Highway User Tax Distribution Fund and the Transit Fund. That is how the legislature cut the pie

        According to this NPR report, the average new car price topped the $30,000 mark in 2012:

        http://www.npr.org/2012/04/06/150112247/average-u-s-car-price-tops-30-000

        MVST for that vehicle is about $2000. You are proposing another $2000 of general fund destined sales tax, for a total of $4000? On top of that add title and license. That is a lot of tax for something that serves many of us as a necessity.

        Buy a piece of furniture. When you grow tired of it you might sell it. eBay, craigslist, word-of-mouth, none will extract sales tax. I have purchased cars with a long lineage of ownership; each time those cars changed hands, they were taxed anew. It seems that the state is already extracting plenty from car sales.

        • Submitted by Alex Cecchini on 12/02/2014 - 02:18 pm.

          Yes, sorta.

          I agree that in the past the MVST was dedicated mostly to the general fund. The year it shifted from majority general fund to majority transportation was actually 2003 as shown in this document (which I linked to in my post) http://www.house.leg.state.mn.us/hrd/pubs/mvsttrns.pdf As of 2002, 69% went to the general fund, and in 2003 that number dropped to 46.25%. The reason? The DOT was desperate to fund its roads and we also needed a dedicated source of funds for the Hiawatha (now Blue Line) to match federal dollars. Despite a rather progressive increase in MN gas taxes and shift of the MVST to transportation over the last decade, user fees still don’t cover highway costs – but that is not the point of this article.

          However this shift left a gap in revenue for the general fund, which is why we went from 6.5% to 6.875% in 2009.

          To answer your question, my proposal would lower the overall sales tax rate to 5.48%, and then yes be applied to car sales. For a $30k car, this would be an extra $1,644 (not $2,000). But I will again stress that this new, lower rate will now save the average family sales tax on every other purchase. Every $500 TV you buy now costs $6.98 less in sales taxes. Every $50 blender costs $0.69 cents less. Every time you replace the tires on your car for $400 you spend $5.58 less. I could go on. If you can provide a legitimate reason why gasoline is exempted from sales tax but motor oil and windshield wiper fluid are charged, or why a car is exempt but a boat, ATV, snowmobile, bicycle, or tires aren’t, go for it.

          I would argue that a car being a necessity for daily life is a failure of government policy. If our land uses and transportation system make it impossible for the vast majority of people to get around without a car, then we’ve failed ourselves (and in particular, lower-income people for whom car ownership is a very hefty burden on the annual budget). Those lower-income people are also hit much harder as a % of their annual income by our high sales tax rate. If we want our tax policy to have the lowest burden possible on lower and middle income families (some of which may only own 1 car or drive fewer miles than those who choose to live in big houses further from work), then lowering the sales tax by including cars/gasoline is a good route.

          As to used car sales between individuals.. I’m sure no one ever misreports the sale price on the title to lower their sales tax burden, right?

          • Submitted by Steve Rose on 12/03/2014 - 07:02 am.

            Legitimate Reason

            Your link backs my statement, “Back in 2007, the biggest destination for the MVST was the general fund.” That year 46.25% went to the General Fund (the biggest pot); the next biggest pot is 30% to the Highway User Tax Distribution Fund.

            What makes automobiles and gasoline different than TVs and blenders is that cars and gas are already heavily taxed. The state tax alone in Minnesota is $.30/gallon; $6 on every 20 gallon fuel fill. Roads benefit more than just those people owning and fueling automobiles. They enable the delivery of goods and services, access by emergency responders, and ways of travel for bicyclists, electric cars, and pedestrians. It is nice for walkers to be able to cross the Mississippi on a day like today; the water is too firm for a canoe and insufficiently firm to walk upon. The roads near your apartment or house enabled delivery of the building materials and workers that made that structure possible.

            Where next with the “I don’t use it directly, so I don’t pay” philosophy? Public schools come to mind.

            “I would argue that a car being a necessity for daily life is a failure of government policy.” I blame it on the climate and the weather. Typically, I would be bicycle commuting to nearly the end of November; my last day this year was November 7. An automobile is not a necessity for my daily life, but I need it often enough to own and maintain one.

            According to the state, “Sales tax is due on most purchases or acquisitions of motor vehicles. It is based on the total purchase price or fair market value of the vehicle, whichever is higher.” So, no there is not a lot of misreporting.

            How it works: https://dps.mn.gov/divisions/dvs/Pages/Motor-Vehicle-Sales-Tax.aspx

  6. Submitted by Steve Rose on 11/29/2014 - 03:28 pm.

    Scenario 2

    That is not the way it works.

    You cannot avoid sales tax by buying out of state; the tax is collected when the title is transferred and the vehicle is licensed in Minnesota.

    • Submitted by Alex Cecchini on 12/01/2014 - 02:06 pm.

      In agreement

      I even note later in the post that we charge a use tax when titling the vehicle. The discussion was more a political one (I can guarantee it would come up on the floor that WI would see an increase in car sales as a result) and just to illustrate a different scenario.

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