The Impact of State Taxes on the Development and Growth of the Trucking Industry

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BACKGROUND

On the average, a typical U.S. trucking firm earns only 3 to 4 cents on the dollar after taxes, compared to the 7 to 9% average profit margin of the heavy manufacturing industry (Dun and Bradstreet, 1999). As such, there is a growing concern regarding the profitability of the U.S. trucking industry, despite strong shipment growth and a moderate increase in freight rates over the last few years. Such anxiety partially originates from volatile fuel prices, and chronic truck driver shortage and retention problems. To make matters worse, some states such as Kentucky, still levy taxes on regionally based trucking firms and their assets. These taxes include the motor vehicle usage tax (MVUT) and the weight distance tax (WDT). These taxes can further reduce the trucking industry's thin profit margin and exacerbate its competitiveness.

For instance, in Kentucky where both MVUT and WDT are still intact, it has the second highest trucking business failure rate among eight neighboring states (see Appendix A). Such a high business failure rate is puzzling, given that the average revenue per trucking establishment in Kentucky during 1997 was above the national average and far greater than those of three neighboring states (Missouri, Virginia, and West Virginia) (See Appendix D). Many trucking firms believe that Kentucky's unique tax policy is the culprit.

Kentucky's MVUT is similar to taxes charged in many other states. It is basically a sales tax on all motor vehicles, including the rolling stock purchased by trucking firms. Some states, such as Kentucky, make all rolling stock fully taxable, whereas others cap the tax at a maximum fee or apportion it according to mileage driven in state. The last two methods are often less of a burden than those imposed by full coverage. Florida apportions sales taxes so that the more a truck is driven out of state, the less its owner pays. Some states, such as Indiana, exempt rolling stock from usage/sales taxation completely (American Trucking Association, 2000).

For example, a $100,000 purchase of rolling stock by a trucking firm that chooses to register and plate the truck in Kentucky, results in the owner having to pay an additional $6,000 in usage/sales taxes (6% sales tax ' $100,000). In Indiana, where rolling stock is exempt from that state's sales taxes, an owner would not have to pay $6,000. A trucking firm owner in Kentucky would do better to license his/her truck in Indiana and buy parts or rolling stock from an Indiana supplier than to conduct such transactions in Kentucky. In states where there is a cap, like North Carolina or Vermont, the owner pays a pro-rated amount of what the tax bill would ordinarily be. Since equipment costs account for 34.3% of a truckload carrier's costs, MVUT can raise an owner's cost of capital substantially and thus can be perceived as an economic burden by the carrier (Boyer, 1998). Kentucky's weight distance tax (WDT) is unique in that Kentucky is one of only four states (Kentucky, New York, New Mexico, and Idaho) that levy such a tax. Weight distance taxes also have been called ton-mile taxes or ton-axle taxes in other states because the intent of such taxes is to penalize the heaviest users of roadways and those who cause the greatest amount of depreciation in highway pavement and infrastructure. Thus, the owners of large, heavy commercial trucks pay a greater amount in taxes to a state's road fund than would the owners of much smaller vehicles. These trucks usually have five or more axles for both tractor and trailer and usually weigh around 60,000 pounds or more. From a public finance standpoint, such a tax makes sense if the heaviest user of a public good can be identified.

The dilemma is whether the user can pay the tax, and if so, can the tax be collected in a fair and efficient manner using self-reports. If not, some trucking firms will take the opportunity to "cheat" on taxes. Their marginal costs of creating road depreciation and restoration are borne by someone else (Boyer, 1998). …