The odd tale of the motor vehicle tax cut

One of the biggest surprises on the Governor´s budget last week was  doing away with the motor vehicle property taxes, or to be more precise, on the taxes for vehicles worth less than $28, 500. In a state where towns rely a great deal on property taxes (a bad idea, by the way), axing one of their potential sources of revenue has been greeted by howls of protest by Mayors and First Selectmen all over the state.

IMAG0184Behind this change on property taxes, however, we should keep in mind two main issues. First the motor vehicle property tax is a fairly lousy way to collect money in the first place. Second, eliminating it without providing an alternative to municipalities is a terrible idea.

We will start with the tax itself. The car tax, by itself, is wildly inconsistent. The same car, owned by two people across municipal lines, can generate a tax bill four or five times larger, just from the huge mill rate disparities. Real state property taxes are similarly unfair, but at least you can´t move a house from New Haven to Greenwich and call it a day. Car taxes, however, make this big differences specially galling.

In addition, Municipal tax collectors really don´t like car taxes that much. For starters, it doesn´t raise that much money in the first place; 5.5% of local budgets, according to CCM, requiring a hefty amount of paperwork to do so. The problem, however, is that some towns barely get any money out of them as they rely more on taxing residential and commercial property (as is the case of Stamford, where it only accounts for 2% of the budget) while it is a big chunk of the taxable grant list in other places (Sprague, 20% of their income). This means that in some towns eliminating the tax could be compensated with a slight adjustment in the mill rates, while in others it will translate into a large tax increase elsewhere. The incidence of this change, as a result,  greatly depends on the economic activity of each town. Opening a big hole on municipal budgets without offering any way to compensate for the loss is, by itself, a bad idea.

What are the alternatives? A good, workable alternative would be turning the car property tax into a state tax with a uniform mill rate, and increasing municipal aid from the general fund. After all, the state has to pay for its roads somehow, and with cars getting more efficient the gas tax really doesn´t have the revenue potential it used to. A state car tax would eliminate the regressive silliness of having the same car pay more taxes in Hartford than in Avon, and enable the state to plug the hole in municipal budgets at the same time. What does not make sense is have the Legislature mandating expenditures and cutting taxes to local governments, without putting more money on the table.

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