Rental Car Taxes
By Allison Hiltz and Luke Martel | Vol . 23, No. 16 / April 2015
Did you know?
Consumers who plan to rent a car on their next trip may be surprised by the final costs. Over the years, state and local governments have added extra taxes and fees to the process in an effort to boost revenues. This is partly because rental car taxes presumably affect out-oftowners the most, allowing lawmakers to raise taxes without affecting their constituents. People are increasingly car sharing—renting cars locally and by the hour—and they are subject to the same taxes and fees they would pay for traditional car rentals. This shift is helping to drive growing opposition to such taxes from both consumers and the car rental industry.
Like most purchases, short-term rental cars—typically defined as passenger vehicles rented for less than 30 days—generally are subject to state and local sales taxes. However, many states also impose an additional tax specifically on the vehicle. In total, more than 40 states levy an extra charge on rental cars, either by imposing an additional tax, a daily fee or both. The nature of the tax varies from state to state, with states imposing a surcharge, automobile rental tax or tourism tax. Regardless of what the taxes are called, they are meant to boost state revenues. Depending on where one rents a vehicle, consumers can expect to pay state taxes on rental cars ranging from less than 2 percent to more than 11 percent.
State rental car taxes are used for a variety of purposes. Some states—such as Iowa, New York, Virginia and Washington—funnel rental car tax revenues into transportation-related funds. Others, including Montana and North Carolina, deposit the revenues into the general fund, allowing them to be used at the discretion of the legislature.
In addition to rental car taxes levied by the state, the total price at point of rental often includes a number of additional fees and taxes. At least 15 states authorize local governments to impose their own taxes or fees, and rental car companies can add on charges for off-site rentals, airport fees and insurance coverage.
Over the years, several cities have used their local option to tax rental cars to fund specific projects, such as financing the construction of a stadium or convention center. According to the Curb Auto Rental Taxes Coalition, at least 33 stadiums have been built that were, in part, financed by rental car taxes. The coalition, members of which include various rental car companies and automobile manufacturers and dealers, actively lobbies against “discriminatory” taxes, or those that target a specific industry. Municipalities, however, argue that such taxes and fees help make up for local revenues lost as a result of state-level budget cuts.
Over the past two decades, short-term rental car taxes were increased in several states. In 2011, Hawaii increased its rental car fee for two years in order to raise revenues, and Minnesota increased its tax rate in 2013.
How people get around, however, is changing, and the rental car industry is adapting to the growth in alternative modes of transportation. Traditional rental car companies—such as Enterprise Holdings, Hertz and Avis—are adopting new models such as car sharing, which typically entails a driver renting a vehicle by the hour. Car sharing is growing in popularity and is taxed the same as a traditional rental car. This affects consumers in states that charge a daily fee for renting a vehicle because someone renting a car for two hours is charged the same as someone renting it for eight hours. Florida recently cut its per-use surcharge on car-sharing vehicles by half, from $2 to $1.
Federal legislation banning discriminatory rental car taxes at the state and local levels was introduced in Congress in both 2011 and 2013, largely supported by the rental car industry. According to a 2009 study by The Brattle Group, Effects of Discriminatory Excise Taxes on Car Rentals, an increase in rental car taxes resulted in decreased demand. According to the report, “a 10 percent increase in discriminatory taxes relative to the base rental rate will result in a 19 percent decrease in the number of rentals and a 28 percent decline in the number of rental days.”