Repeal of the sales and use tax on used vehicles
"No More Used Car Tax"
In both law school and tax school we discussed the necessity of a tax system operating in a fair manner. In more than 20 years of practicing tax and business law I have personally observed the harmful effects of tax laws that are unfair in either application or administration. However, you don't need a law degree or a tax degree to recognize the fundamental unfairness of taxing the same item three, four, or five times. Common sense is more than enough to come to this conclusion. This issue has particular importance when we examine the way automobiles are taxed in California.
As we all know, owning an automobile is a necessity of life in Southern California. With our limited public transportation system, an automobile is often the only way to get from point "A" to point "B." However, most of us do not realize the exorbitant amount of state tax we pay for the privilege of driving an automobile in California. The hypothetical life of an automobile in California will illustrate my point.
Let's assume we've finally saved enough to purchase a new car. For simplicity's sake, assume the vehicle costs $20,000. The state imposes a sales tax of 7.75% and the new car must be registered with the Department of Motor Vehicles, which charges a flat fee of $35.00, plus 2% of the value of the car. At this point our $20,000 car has increased in price to $21,985.00, or an additional $1,985.00 for our car.
Now let's continue to follow the car on its hypothetical journey to a salvage yard at some point in time. If we trade in the car to a dealer five years after purchase, and the dealer resells the car for $10,000, a sales tax of 7.75% is again paid increasing the car price to $10,775.00. Add in another DMV fee and the car price has increased to $10,987.00, or an additional $987.00 for the car. At this point the state has assessed taxes and fees equal to 19.5% plus $47.00.
Let's just go one more step in the journey. If the owner of our car sells it to a college student for $5,000, we have a 7.75% use tax paid by the college student and a DMV fee. The price of the car to our college student is now $5,499.50, or an additional $499.50 for the car.
If the car's life is going to end while the college student owns it, we now see the state has assessed taxes of 29.25% plus fees of $59.00 on the vehicle, or a grand total of $3,471.50. This figure, of course, does not include all of the annual registration fees of 2% of the value of the vehicle paid every year during the life of the car. It is quite clear that driving an automobile in California is an expensive proposition, made far more burdensome by numerous taxes and fees. I strongly believe the payment of a sales tax solely on the first sale of a vehicle, and a yearly DMV fee is a large enough burden on a single product, and more particularly, on an item that is such an integral part of our daily life.
In researching the issue of multiple taxation of a vehicle, I reviewed the 1995-1996 Annual Report of the California State Board of Equalization. Although the use taxes collected on private car sales are not separately stated, the sales tax collected from used motor vehicle dealers amount to a mere .91% of the total sales and use tax collected. In advocating the elimination of the used car tax, I am certain there will be people who will cry out that the revenue needed by our state is greatly imperiled. My answer to them is twofold. First, our robust state economy is generating ever increasing tax revenues, which in my opinion mandates tax relief for our citizens. Secondly, with every tax cut I have ever observed, there is always a group that makes dire predictions of immediate and fateful consequences. Unfortunately, the logical extension of this group's cry would be a system that never enacts any type of reduction or repeal, notwithstanding revenue growth and fairness. I think it is time we bring back some fairness to our system.
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