State and Local Value-Based Taxes on Motor Vehicles

January 1998

In his 1997 run for governor of Virginia, candidate James Gilmore campaigned successfully on a platform of reducing the local property tax on automobiles. Other states have taken notice. Early in the 1998 legislative sessions, proposals have surfaced in several states to reduce or repeal the personal property tax on cars.

States tax motor vehicles in several ways. Most states (and localities with local option sales taxes) impose a one-time sales tax on the purchase price of new or used cars. States also impose:

Value-based taxes (personal property tax or "in lieu" tax),
Weight-based taxes,
Flat rate registration taxes or fees,
Some combination of the above.

Value-based taxes are deductible from federal income taxes for taxpayers who itemize deductions, while other taxes and fees are not.

This report examines state value-based taxes on private, noncommercial motor vehicles. It does not include state or local flat rate registration fees or fees and taxes based upon vehicle weight. It presents the results of a 50-state NCSL survey of state legislative and executive branch tax staff.

Valuation Methods

The first step in the process of imposing property taxes or other value-based taxes on motor vehicles is to determine the vehicle's value. In most states, the value is determined under procedures specified in state law. The three common methods specified by law are:

National Automobile Dealers Association (NADA) "blue book" value
Manufacturers Suggested Retail Price (MSRP) base method or
Purchase price base method

The NADA method allows local assessors to set values for used vehicles based upon their "trade-in" value in the national market. The NADA blue book contains several adjustments to valuation (such as low mileage, air conditioning, etc.) that add additional uncertainties in the valuation process. These uncertainties can lead to more appeals by taxpayers. In 1995, Kentucky adopted a "mid-point" valuation standard that allows assessors to split the difference between the highest and lowest valuations in the NADA blue book.

The MSRP base method uses MSRP as the basis for current and future vehicle valuations. In these states, a depreciation schedule reduces the MSRP base by a set percentage each year until the vehicle reaches some "residual" or minimum value for tax purposes. The MSRP base method adds certainty to the assessment process, but is probably a less accurate method for determining the true market value of used vehicles.

Purchase price is similar to the MSRP base method, only it uses the purchase price after negotiations and discounts. Since most purchasers negotiate discounts from the MSRP, the purchase price method results in lower valuations for new cars. For purchases of used cars, it establishes tax values that are closer to true market value than the MSRP method.

Tax methodologies

State tax methodologies generally fall into one of four categories:

No state or local property or value-based taxes--20 states
Local property taxes at rates set by local jurisdictions--12 states
State or local value-based taxes in lieu of property taxes at statewide rates--16 states
Other local option--three states

map

No tax. Twenty states levy no value-based taxes on motor vehicles. Most of these states impose flat registration fees or fees and taxes based upon vehicle weight. Some of these states, like Ohio and Illinois, exempt all personal property from property taxes. However, most states have specific statutory property taxes for registered motor vehicles.

Personal property taxes. Twelve states allow local governments to tax motor vehicles as personal property under general statutes. In these states, vehicles are subject to the same property tax mill rates as other real and taxable personal property. Typically, local jurisdictions with authority to levy property taxes (counties, school districts, cities and special districts) impose their own mill levies and receive revenues from motor vehicle property taxes. Rates vary within counties, depending upon the city or municipal rates and school district rates. The system in Kansas is slightly different--taxes are levied at uniform countywide rates based on the average mill levy.

In most states, local governments apply mill levies to the NADA blue book value. However, a few states apply different assessment ratios for motor vehicles and homes. Assessment ratios determine the percentage of market value subject to taxation. Alabama, for example, applies mill rates to 10 percent of the value of real estate parcels and 15 percent of the value of motor vehicles. Missouri applies a 19 percent assessment ratio for real estate and a 33.3 percent ratio for motor vehicles. In both states, the effective tax rates on motor vehicles is higher than on real estate.

In states with local personal property taxes, there are often large disparities in the rates faced by taxpayers in different jurisdictions. This can generate complaints that the system is inequitable and can lead to tax avoidance. Avoidance is a particular problem for motor vehicles because of their mobility. Determining the situs (physical location for tax purposes) is difficult, especially if a taxpayer owns property in more than one place.

State or Local "In lieu" Taxes. Sixteen states levy "privilege" taxes that are based on vehicle value but are levied "in lieu" of property taxes. These states have shifted to in lieu taxes to eliminate situs and tax disparity problems. Although rates are uniform, revenues are collected by the state in nine states and locally in seven. Even where the state collects the tax, revenues are typically returned to local governments through a formula. One exception is Washington, where revenues are split between K-12 education and local transit districts.

Thirteen of the 16 states that levy in lieu taxes use MSRP, while California and Indiana use the purchase price method. Utah uses purchase price for new vehicles and NADA blue book for used cars.

Other. Alaska, Rhode Island and Texas offer local governments the option to tax vehicles. In Alaska, local jurisdictions may choose from a personal property tax, a local registration tax levied at flat rates based upon the age of the vehicle or no local tax. Rhode Island allows municipalities the option of levying higher rates on vehicles than real estate. Texas gives local jurisdictions the option to tax or exempt motor vehicles; only 124 of the 3,000 or so jurisdictions levy the tax.

Effective Tax Rates

Since some states use assessment ratios to determine taxable values for motor vehicles, NCSL converted all tax rates to effective rates in order to provide meaningful comparisons among states. Staff from states with local personal property taxes were asked to provide either a range of rates or a statewide average. This information is reported in Column 3 of the Appendix.

Effective rates measure the tax rate as a share of the vehicle's market value. For example, a 2 percent effective rate on a vehicle valued at $10,000 creates a tax liability of $200. One caveat should be noted for states with statewide in lieu taxes. Although the effective rate reported here is accurate for new vehicles, it may not be accurate for used vehicles. Automobiles depreciate at different rates, based on the make and model. Most states that use depreciated MSRP or purchase price methods have depreciation schedules that are slower than the "blue book," thereby overstating the vehicle's value when compared with the NADA blue book. Thus, reported rates in states with in lieu rates may underestimate the true effective rate for used vehicles.

States with uniform tax rates reported effective rates ranging from a low of 0.5 percent in Michigan to a high of 2.4 percent in Arizona and Maine. The median rate in the 16 states with uniform state or local rates is 1.8 percent.

In states with rates determined locally, there were enormous disparities among and within the states. The highest reported rate was in Rhode Island, where one local jurisdiction levied a tax at 5.4 percent of value. The lowest reported rate was in Alabama, where one jurisdiction levied a property tax at only 0.3 percent of market value. Using reported statewide average rates and the midpoint of reported averages, the range is from 0.6 percent in Arkansas to 3.6 percent in Virginia. The state median average or midpoint rate in local personal property taxes is 1.9 percent, close to the median rate of 1.8 percent in states with uniform in lieu rates.

Appendix A. Summary of State Value-Based Motor Vehicle Tax Provisions

State	Motor Vehicle Property Tax	Range of Effective Rates
Alabama	Property tax determined locally with values set by the state. Mill rates applied to 15% of NADA blue book value.	0.3% to 1.5%
Alaska	Local governments may opt to levy personal property tax. They also may opt to levy a motor vehicle registration tax based on vehicle age in lieu of property tax. When imposed, property tax is levied at 100% of market value. Property tax rates range from 5.13 to 27.168 mills.	0.5% to 2.7%
Arizona	State vehicle license tax in lieu of property tax, levied at 4% of 60% of the MSRP. Value depreciates annually 15% from the previous year's value with a $10 minimum.	2.4%
Arkansas	Motor vehicles taxed at 20% of market value at local tax mill rates. Average rate is 32.1 mills.	State average 0.64%
California	Property tax levied at statewide rate based on sale price depreciated by uniform state schedule; collected by state as part of vehicle registration process and distributed to local governments. Range is 2% of sale price in the first year to 0.3% in 11th year, with a $10 minimum.	2%
Colorado	Property tax levied at statewide rate based on 85% of MSRP depreciated by uniform state schedule; collected by counties as part of vehicle registration process and distributed to local governments. Rate is 2.1% in year one, falling to 0.45% in years five through nine, with a $3 minimum thereafter.	1.8%
Connecticut	Motor vehicles assessed at 70% of market value. Local property taxes levied at rates ranging from 10 to 75 mills. Average mill levy is 35 mills.	0.75% to 5.25%
Delaware	No state or local property tax.	No tax
District of Columbia	No state or local property tax.	No tax
Florida	No state or local property tax.	No tax
Georgia	Property tax determined locally, levied on 40% of fair market value. Levies range from 9 to 62 mills. State also levies a quarter mill tax with an effective rate of 0.01%	0.36% to 2.48%
Hawaii	No state or local property tax.	No tax
Idaho	No state or local property tax.	No tax
Illinois	No state or local property tax.	No tax
Indiana	State excise tax levied in lieu of personal property tax. Tax set by schedule in state statute, using purchase price depreciated over 10 years. First year tax for a $7,000 vehicle is $103; a $20,000 vehicle, $250; a $42,500 vehicle, $532. Minimum tax $12.	Varied based on value -- for most vehicles, rates range from 1.25% to 1.5%
Iowa	No state or local property tax.	No tax
Kansas	Tax in lieu of property tax levied based on countywide average mill levies. State provides value schedule allowing 15% depreciation each year until year 15 when tax is a flat $24. Effective rates in 1998 range from 1.6% to 4.2%.	1.6% to 4.2 %
Kentucky	State and local personal property taxes levied based on midpoint NADA blue book value. Rate is the sum of mill levies from all local jurisdictions with authority to levy property taxes.	State rate, 0.45%; Local rate average is 0.85%
Louisiana	No state or local property tax.	No tax
Maine	State tax in lieu of local property tax 2.4% of MSRP in the first year, declining to 0.4% of MSRP in the sixth year and thereafter.	2.4%
Maryland	No state or local property tax.	No tax
Massachusetts	Local governments collect excise tax at statewide rate of 2.5% of 90% of MSRP in lieu of a personal property tax. Value depreciates to 10% in years five and thereafter.	2.25%
Michigan	For model year 1984 and newer, state levies an excise tax in lieu of a property tax. Tax is 0.5% of MSRP in first year, with tax reduced by 10% of prior year's tax in second through fourth years and frozen at the fourth year level thereafter.	0.5%
Minnesota	State tax levied in lieu of personal property taxes at 1.25% applied to 100% of the MSRP in years 1 and 2; 90% of MSRP in years 3 and 4; 75% in years 5 and 6; 60% in year 7; a flat $25 in years 11 and thereafter.	1.25%
Mississippi	Local property tax levied on 24% (30% less a 6% credit provided by counties reimbursed by state) of NADA blue book at same mill levy as real property. Average levy is 110 mils.	State average 2.64%
Missouri	Property tax levied at mill rates determined locally based on 33.3% of NADA blue book values. Weighted average local mill rate is 59 mills.	State average 1.9%
Montana	Personal property tax levied statewide at 2% of the depreciated MSRP after the first year. Only state sales tax is imposed the year vehicle is purchased. Counties have the option of levying an additional 0.5%.	2% state mandated rate with additional 0.5% county option levied in most counties.
Nebraska	State tax levied in lieu of local property tax with money distributed to local governments. Initial tax is based on schedule set in state law using sticker price as base. Sticker price is depreciated on a 14-year schedule. For cars with sticker price of $10,000 or less, base (first year) tax is $60. For cars with a sticker price of $20,000, base tax is $300. Base tax increases to a maximum of $1,460 for cars with a sticker price of $78,000 and up.	Ranges from 0.6% for cars with sticker price under $10,000 to 1.87% for cars costing $78,000.
Nevada	State privilege tax levied in lieu of local property tax; money distributed to local governments. Tax is 4% of 35% of MSRP, depreciated by 10% per year until residual value of 10% in year 10 and thereafter.	1.4%
New Hampshire	Local registration tax levied at set in state statute: Year 1 - 1.5% of MSRP; year 2 - 1.2%; year 3 - 0.9%; year 4 - 0.6%; year 5 and thereafter - 0.3%, with a minimum tax of $5.	1.5%
New Jersey	No state or local property tax.	No tax
New Mexico	No state or local property tax.	No tax
New York	No state or local property tax.	No tax
North Carolina	Property tax levied on "true cash value" as determined by local assessor at rates determined by local governments.	Weighted average -1.2%; local rates range from 0.6% to 1.7%
North Dakota	No state or local property tax.	No tax
Ohio	No state and local property tax.	No tax
Oklahoma	State registration tax in lieu of local property tax, levied at 1.25% of factory delivered price in the first year. Each year thereafter the tax is 90% of the previous year's, until year 20 when tax is zero.	1.25%
Oregon	No state or local property tax.	No tax
Pennsylvania	No state or local property tax.	No tax
Puerto Rico	No response.	NR
Rhode Island	Property tax at mill rates determined locally. Values set by state Vehicle Value Commission. Effective rates range from .975% to 5.4% of value.	.975% to 5.4%
South Carolina	Property tax at mill rates determined locally. Values set by state using NADA blue book. Mill levies applied to 11% of the vehicle value.	2% to 3.75%
South Dakota	No state or local property tax.	No tax
Tennessee	No state or local property tax, although counties may levy a local option registration fee.	No tax
Texas	About one in 25 jurisdictions levy a personal property tax. Vehicles assessed at 100% of market value as determined by NADA blue book.	No tax in most jurisdictions; 2% - 3% in a few jurisdictions
Utah	Counties collect local property tax at uniform state rate of 1.5% of NADA blue book.	1.5%
Vermont	No state or local property tax.	No tax
Virginia	Property tax at mill rates determined locally. Each locality establishes fair market value by using loan, trade-in or retail value as determined by a recognized pricing guide. Localities establish different assessment ratios ranging from 15% to 100% of fair market value Effective tax rate charged by localities varies widely. Statewide average tax rate is 3.78%. Some local governments prorate personal property tax levies. Statewide nominal average, including pro-ration, is 3.58%	3.58% nominal statewide average
Virgin Islands	No state or local property tax.	No tax
Washington	State levies tax in lieu of personal property tax. Tax is 2.2% of MSRP depreciated on a state schedule to minimum value of 10% of MSRP after 12 years. Additional 0.3% local option tax in specified counties. A portion of the funds is distributed to transit agencies.	2.2% 2.5% in certain counties
West Virginia	Local property tax levied by taxing jurisdictions and collected by the county treasurer.	0.8% to 1.9%
Wisconsin	No state or local property tax.	No tax
Wyoming	Property tax levied by counties at a statewide rate: year 1 - 3% of 60% of msrp; year 2 - 3% of 50%; year 3 - 3% of 40%; year 4 - 3% of 30%; year 5 - 3% of 20%; year 6 and thereafter - 3% of 15%.	1.8%

Source: NCSL survey of state fiscal offices and state revenue departments, 1/98; state statutes.

Posted January 1998, format reviewed June 2004
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