Academic journal article Journal of Economics and Economic Education Research

The Effects of Motor Vehicle Wealth Taxes on Households' Vehicle Purchase Decisions

Academic journal article Journal of Economics and Economic Education Research

The Effects of Motor Vehicle Wealth Taxes on Households' Vehicle Purchase Decisions

Article excerpt


As of 2001, annual wealth taxes on motor vehicles were used in twenty-eight states in the United States in the form of either an ad valorem personal property tax, a tax in lieu of a property tax or an age-based fee. In recent years, politicians have proposed the reduction or removal of motor vehicle wealth taxes to take advantage of their unpopularity to win votes. Such proposals have been very popular among the electorate but have been difficult to implement since these taxes represent a stable source of revenues for state and local governments. Empirical evidence from Dill et al. (1999) also suggests that motor vehicle wealth taxes are less regressive than sales and gasoline taxes frequently used by state and local governments.

Despite these positive qualities, these taxes may be inefficient as they may distort household decisions regarding their vehicle fleets, which in turn may have consequences for the environment. Specifically, a high tax on vehicle wealth might encourage a household to keep or purchase an older vehicle, thereby possibly increasing air pollution. The incentive effects provided by annual motor vehicle wealth taxes have received relatively little consideration. (1) The potential unintended consequences of these taxes on vehicle age distributions, emissions and air quality suggest the importance of investigating the effects of these taxes on household vehicle purchase and vehicle age decisions.

Motor vehicle wealth taxes tend to be based on either the age or value of the vehicle which results in a tax liability that decreases with age. Given this structure, consumers have an incentive to make adjustments to their vehicle stocks in favor of older vehicles as they receive preferential tax treatment. Specifically, motor vehicle wealth taxes are expected to affect household vehicle purchase decisions in two ways. First, households that reside in a state with a wealth tax on vehicles are expected to delay the purchase of a newer vehicle. A household can expect to have a higher motor vehicle wealth tax liability when it replaces an older less valuable vehicle with a newer more expensive vehicle or makes an addition to its vehicle stock. All else constant, the higher tax liability may discourage many households from purchasing a vehicle. Second, those households living in wealth tax states that do purchase a vehicle are expected to purchase older vehicles on average, all else constant. Given that a household has decided to purchase a vehicle, the structure of motor vehicle wealth taxes provides an incentive to purchase older vehicles as their absolute tax liabilities, and in some cases their tax liabilities as a percentage of their value, are lower than those of newer vehicles. Thus, the age distribution of vehicles in states with a wealth tax is expected to be skewed towards older vehicles as consumers have the incentive to delay the purchase of a newer vehicle or to enter the used vehicle market.

If motor vehicle wealth taxes have indeed delayed fleet turnover, they might have resulted in additional unintended consequences, namely a decrease in air quality resulting from an increase in emissions from motor vehicles. Older vehicles are likely to emit larger amounts of harmful pollutants due to their less sophisticated emission control systems and the deterioration of these systems over time. Simulations using the Environmental Protection Agency's most recent emissions model (MOBILE6) reveal that a 20 percent age shift to older vehicles yields a 50 percent increase in hydrocarbon and carbon monoxide emissions and a 40 percent increase in nitrogen oxide emissions (Environmental Protection Agency, 2002(b)). (2)

Therefore, to the extent that motor vehicle wealth taxes affect vehicle age distributions, changes to these taxes may be viable options for governments charged with the task of decreasing mobile source emissions. Specifically, states with areas that have air pollution levels that persistently exceed ambient air quality standards and have thus been classified as nonattainment areas by the Environmental Protection Agency might be able to make adjustments to their wealth tax policies to achieve attainment status. …

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