Governments Targeting Car Rentals for Project Revenue

Study shows excise and flat taxes hurting industry and consumers

A report issued in March by Washington-based taxation policy lobby group Tax Foundation is stressing that the car rental industry is being singled out for taxes by most state governments. The taxes, which usually go to more project-based government expenditures like stadiums and cultural endeavors, are usually in the form of excise taxes. However, some states also add flat car rental taxes.

“Excise taxes on car rentals are unsound tax policy, as they narrowly target one industry in the hope of exporting the tax base onto nonresidents,” stated the report. “This has negative effects for residents when they pay higher prices for rental car services.”

One major negative repercussion has most people who would otherwise rent a vehicle in a state destination change their travel plans and opt to visit another state that has lower car rental taxes. The report recalled a recent situation when travelers avoided paying a daily $4 rental car tax levied in Kansas City, Missouri to help fund the Sprint Center.

Most travelers opted to book vehicles in the neighboring state of Kansas instead. Consumer reaction more than offset the benefits of the tax in the Missouri municipality, which suffered from fewer car bookings and increased unemployment in the vehicle rental business.

Still, the need to find a better deal hasn’t stopped cities in 35 states from imposing excise taxes on the industry. Georgia imposed one of the highest taxes at 10 percent to help subsidize the State Farm Arena, while counties in the state of Washington levied one of the lowest at one percent to support regional public transit and sports facilities. Boston was among the few cities that imposed a flat daily tax, levying $10 a day to support the upkeep of convention centers in the municipality.

The study also suggests that excise and flat taxes put car rental companies in an unfair competitive position against car-sharing firms like Lyft and Uber, since those businesses don’t rent vehicles to its customer base. None of the policies scrutinized by the report addresses how the ride-sharing industry should be taxed.

Tax Foundation advocates governments to examine the effects of taxing car rental firms, since the evidence indicates that these measures not only shift the taxation burdens on travelers, they also hurt local businesses in the industry. The organization also recommends a more prudent system that builds the levy into sales tax bases, since current policies don’t take into account other traveler options like ride sharing.

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