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The Car Tax
THE CAR TAX....The LA Times chimes in this morning to suggest that if Arnold Schwarzenegger wants to raise revenue, he should think about reimposing the old vehicle license fee, which he cut when he took office, rather than raising sales taxes:
The car tax is a smarter choice than a sales tax for digging out of the current budget hole. Asking Californians to pitch in through their vehicle registration fees rather than at the cash register would have fewer negative effects on sales, which we can expect to be diminished too much already in the coming months.
Sales taxes are regressive: They take a higher percentage of household income from the poor than from the rich. A 1999 California Policy Research Center study found vehicle license fees to be nearly as regressive, but at least the proceeds are unrestricted and could be used to bail the state out of its mess. Because of voter fiat, sales taxes paid at the gas pump are off limits for any use but transportation. Local government also claims a share. Another advantage of car taxes: They are deductible from federal income tax. Try deducting your sales tax on your 1040 form and see how far you get.
I'll add another couple of related points. First, the California sales tax is already high, and local add-ons make it even higher. 
Schwarzenegger's proposal would hike it above 10% in most places, and most of the tax literature I've read suggests that 10% is an upper bound for an effective sales tax. Above that it has serious effects on sales revenue, promotes out-of-state purchasing, and produces compliance problems.
Second, sales taxes are regressive by nature and there's only a limited amount you can do about it (exempting food purchases is the most common approach to adding a bit of progressivity). Not so with the vehicle license fee. Right now the VLF is a flat rate on the assessed value of a vehicle, which is based on its purchase price and a fixed schedule of depreciation (basically 10% per year). It's true that if all you did was raise the VLF to its old rate of 2% it would remain about as regressive as a sales tax (see Table 5 here), but that's not the only way you can do it. Unlike a sales tax, which needs to be a flat rate for administrative reasons, the VLF could easily vary by assessed value. It could stay at its current rate of 0.65% up to, say, $10,000 in assessed value, increase to 2% for more expensive cars, and increase still further to 4% for top end cars. The average rate would still be about 2%, but the incidence of the tax would be more progressive.
And finally, here's one more great reason for increasing the VLF. It's a truism that if you tax something, you get less of it. So ask yourself: which could California use less of? General consumption? Or cars? The question answers itself, doesn't it?
Aren't vehicle license fees regressive as well?
So long as the prevailing folk wisdom is 'Fair' = 'Flat', and the concept of 'marginal propensity to consume/marginal propensity to save' is gibberish to all but a tiny fraction of people and the legislators they elect....
Na Ga Ha Pen.
In fact, regressivity may be be a selling point.
In a country where everyone is middle class, and basically no one self-identifies poor, it may be good politics to design a proper screwing-over for anyone lower on the totem pole than your median voter right into the tax code, so as to increase the chance of passage.
The Massachusetts state income tax, e.g., that survived a referendum challenge, is a flat tax.
The last election is an anomaly. In the long run, predicating your politics on the premise that 'people are shits' is a winner.
Given a contest between St. Augustine and Thomas Jefferson, I'd take the Saint and give the points.
You can build progressivity into the VLF as you described, but you can also build something else into it - a carbon tax, essentially. You could set the VLF at a higher rate for cars that produce greater emissions, and at a lower rate for cars that are cleaner. As California is about to get a waiver to regulate tailpipe emissions under the Clean Air Act in a new Obama Administration, they would certainly be empowered to do so.
As long as we're proposing going back to the VLF (which I fully support), it ought to have a greenhouse gas component to it. That is, the cost of your VLF should be combination of the assessed value and the gas mileage rating for your vehicle. So, expensive gas guzzlers cost the most, while the most efficient cars get a break.
Kevin and halle have it just right. It wouldn't even be the first time Ahnold has admitted a mistake, either.
Restoring the VLF would also require a degree of maturity that Schwarzenegger has still not shown. The Republicans (with whom Schwarzenegger still identifies) demagogued this issue to death when their "no taxes under any circumstances" stand still had some appeal to the electorate--enough to play a major, perhaps, decisive role (along with our fuel crisis) in getting Schwarzenegger elected. Is Schwarzenegger prepared to make that symbolic break? I'd expect him to learn how to act like a grownup first.
Oh, but if Schwarzenegger raised car taxes, wouldn't that be admitting that he was wr... wrrrrooo... uh, wrrrrrrroooonnnnnng when as one of his first acts as Governator, he substantially reduced them?
Don't hold your breathe. Politicians are loath to admit when they were wrrroo... uh... you know what I mean.
As I recall, raising the "car tax" was the main thing that got Gray Davis recalled. I have not listened to 'John and Ken" on KFI for a while, but I can imagine that their show will return to its greatest hits. It certainly would be justice, though, to finally see Arnold admit that Gray Davis was right.
Up here in deep-red central valley, the "tripling of the VLF tax" (redundancy sic) was THE reason Arnold took office. There was no other issue on the airwaves. People HATE paying for their cars.
The brain-dead Hummer pinheads currently believe that they are paying far more than their fair share in state taxes due to the gasoline sales tax. To get their backing, you'd have to build in an *exclusion* for "trucks" (ie, everything over 6k pounds, which would be sold as "small business vehicles" but would coincidentally include all the gas-guzzling penile enhancements).
I'd give a *progressive* VLF hike about 10% chance of passing in the central valley, and that only due to the downtown urban center of Sacramento.
That having been said, I'd rather have this discussion and Alamo-tinged battle now than after CA files for bankruptcy.
(For the record: my family would pay a LOT on either a regressive vehicle fee OR a gas-guzzler fee, as we are a rather large family [6 kids] and so one of our vehicles is a full-size van which is three or four years old. That having been said, I would support such a hike, as it makes structural sense. My SUV-owning neighbors tend not to be so understanding, though.)
Technical point: the LA Times is wrong about the deductability of sales taxes. They CAN be deducted on Sch. A, in lieu of property taxes. For homeowners, it's almost always better to take the property tax deduction, but the option to take sales taxes instead has been in the tax code for several years now.
I concur with the posters above who mention all the pinhead voters who are now convinced that flat taxes are, somehow, better than progressive taxes. They're screwing themselves worse than they can possibly imagine, but the dimwitted simplicity of the flat tax apparently has an irresistible allure.
Count me as another voice for yes on raising the fee and double yes on adding in a guzzler component.
You want more of something you subsidize it, you want less of something you tax it.
Forget tying it to emissions. Too squishy. Make the tax a simple function of gross vehicle weight. It would accomplish the same thing without the complications.
It would make sense to make it more about gas consumption, than about vehicle price. The latter would in fact discriminate against hybrids, and plugins. But it is unfair to the owner of a low mileage vehicle who doesn't drive it much. Far better to have a gas tax -possibly refund the first hundred dollars per person to take some of the sting off. That would at least provide the right incentives, as well as simply raise revenue.
If we're talking about things that California needs less of, why don't we tax plastic surgery?
The vehicle license fee (it wasn't a tax) was based on the price of the car but was gradually reduced as vehicles aged and lost value. That seems more progressive to me.
Arnold was not completely truthful when he said that Gray Davis raised the fee. In fact, Davis was following a law which was enacted by the state when Pete Wilson was governor. It said that when the state was flush the VLF would be waived but if the budget took a hit, (which happened after the dot com bust) it would automatically be reinstated.
My son, who is working hard to support a young family would certainly endorse your suggestion to double or triple his vehicle taxes on his pickup truck, just as long as you give him your credit card number, OK ?
Forget a car tax. The most sensible way for CA to raise income is to tax dogs.
KC has it right- base in on gross vehicle weight.
1-It's objective, since it's stamped on the same plate as the VIN.
2-It's directly applicable, since heavier vehicles not only use more fuel but also cause more wear and tear on the infrastructure.
3-It doesn't change over the life of the vehicle, so it wouldn't be cheaper to register a 10 year old Hummer than a new Prius.
I told my state rep about this a couple years ago, and the light bulbs that went off behind his eyes practically lit the parking lot.
What about raising the income tax on the highest earners? Why would this be any more difficult politically than a car tax or the absurdly regressive sales tax?
California has a SPENDING problem, not a REVENUE problem. It would be a huge mistake to raise taxes, any taxes, at the beginning of this recession. You dont tax your way out, you grow your way out, and you do that by encouraging people and companies to spend money in the marketplace, not by sending more money to Sacramento to be wasted.