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Congress Can And Should Put A Stop To Discriminatory Rental Car Taxes

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This coming Memorial Day is projected to see travel reach a post-recession high, with AAA forecasting that over 36 million Americans will travel 50 miles or more from home during the long holiday weekend. Those traveling by rental car, however, will face undue costs not borne by other travelers.

Having learned that voters don’t like to see their taxes go up, politicians often try to export the tax burden. The go-to move for many state and local lawmakers seeking to raise revenue is to hike taxes on people who can’t vote them out of office, namely travelers and tourists. Due to the increasing popularity of this approach, taxes on things like hotels and rental cars are exorbitant. Today, taxes account for more than 38 percent of the average cost of renting a car.

The latest example of this trend is on display this week in Louisiana, where the state House of Representatives will consider House Bill 585, legislation that would permit localities to raise taxes on rental cars. Since Gov. Bobby Jindal (R-La.) blocked the continuation of a state-sanctioned rental car tax in 2012, local officials have been eager to reinstate this revenue stream, which had been used on things like parks, museums, and art galleries.

Earlier in the year, this author debated the merits of the proposed rental car tax with local officials lobbying for its passage. The mayor of one Louisiana town implored that “it isn’t fair” that his town is not able to tax rental cars. However, the mayor’s lament raises an important question. What exactly is “fair”? How “fair" is it to put the cost of things like museums and parks on the backs of people who won’t even get to enjoy them? Not very.

Rental car taxes are a relatively new revenue raiser. The first rental car tax was enacted in 1976. Today, 43 states and the District of Columbia subject car renters to 118 special rental car excise taxes, often under the faulty assumption that they only hit travelers and not their voting constituencies.

While the political advantage of exporting the tax burden to non-voters is clear, these taxes don’t always hit their intended target. Since the majority of the rental car business deals with replacement vehicles, much of the proposed rental car tax increase would actually be borne by Louisiana residents.

Research also indicates that rental car taxes adversely affect the local economy. A study commissioned by the National Business Travel Association found that rental car tax increases are associated with reductions in both customers and average number of days rented. Demand for rental cars and the length of rentals can decline in response to rental car tax increases, as tourists opt to walk or use other forms of transportation in downtown areas. When visitors still decide to rent a car, they compensate for the increased costs by spending less on meals, hotels, and other activities.

Economists at the Brookings Institution and the Urban Institute studied the impact of a local car rental excise tax in Kansas City. The researchers found a 41 to 59 percent drop in rentals and a 69 to 86 percent drop in the number of rental days at branches affected by the tax.

Rental car companies, unlike other transportation industry enterprises, are unique victims of onerous state and local tax regimes. Railroads and airlines are granted federal protection from the discriminatory taxation faced by those who rent a car. However, there is a federal bill pending in Congress, H.R. 2543, that would put an end to punitive taxation of rental cars. Introduced by Congressmen Steve Cohen (D-TN) and Sam Graves (R-MO), the “End Discriminatory State Taxes for Automobile Renters Act” would prohibit state and local governments from imposing discriminatory taxes on car rentals, like the kind being debated in the Louisiana legislature.

Congress passed a law in 1994 that was intended to stop discriminatory rental car taxation. “Unfortunately,” said Rep. Graves, “local governments have found and exploited a loophole to finance stadiums, convention centers and other non-airport related projects.” The proposed federal bill would, in Rep. Graves’ words, “close the loophole that discriminately taxes unsuspecting consumers.”

“These taxes raise prices for consumers and harm our local employers,” said Rep. Cohen, adding “This is an unfair practice that must stop.”

Reps. Graves and Cohen’s bill would put an end to discriminatory state and local rental car taxes for good and Congress should pass it. In the meantime, Louisiana lawmakers can help stop this practice by rejecting the rental car tax bill that they will vote on this week.

Patrick Gleason is Director of State Affairs at Americans for Tax Reform. Follow Patrick on Twitter @PatrickMGleason