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CRS Report on Excise Tax on Luxury Autos

AUG. 26, 1999

CRS Report on Excise Tax on Luxury Autos

DATED AUG. 26, 1999
DOCUMENT ATTRIBUTES
  • Authors
    Talley, Louis Alan
  • Institutional Authors
    Congressional Research Service
  • Subject Area/Tax Topics
  • Index Terms
    luxury autos, excise tax
    high-income taxpayers
  • Industry Groups
    Transportation
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 1999-29347 (3 original pages)
  • Tax Analysts Electronic Citation
    1999 TNT 174-30
Louis Alan Talley Research Analyst in Taxation Government and Finance Division

SUMMARY

[1] There is a long history of federal taxes on automobiles. The current luxury tax on passenger vehicles was reintroduced with passage of the Omnibus Revenue Reconciliation Act of 1990. At the time of its reintroduction, its purpose was to increase revenues to help reduce large projected federal budget deficits. Other luxury taxes were also introduced at the same time (boats, aircraft, jewelry, and furs) but have since been repealed. All of the luxury taxes were based on a sales price exceeding statutory amounts so as to shift the tax to upper-income individuals. Since passage of the 1990 act, the tax has been extended but at reduced rates, the statutory sales price has been inflation adjusted, and the subsequent installation of small dollar value parts and accessories are exempted from the tax. Current law provides that the 6 percent tax is applied to that portion of the sales price which exceeds $36,000. Both the tax rate and base are scheduled for adjustment in future years. Revenues from luxury auto taxes exceeded $500 million in fiscal years 1995 and 1996. Collections declined in 1997 and in fiscal year 1998 stand at $428 million. Expectations are that revenues will continue to decline as the rate and base erode in future years. This report will be updated to reflect changes in the rate and base amounts.

BACKGROUND

[2] Federal taxes on automobiles can be found as early as 1917. Not only were taxes applied to automobiles but also on auto trailers, trucks, trailers, buses, road tractors, motorcycles, tires, tubes, tread rubber, as well as parts and accessories. Over the course of many years, federal excise tax rates varied between 2 and 10 percent. These taxes were instituted to increase general revenues. It was argued that prior federal expenditures for highways helped development of the automobile as a means of national transportation. Therefore, the industry and consumers should help in the support of the federal government through increased tax revenues. Several arguments were advanced against these taxes on autos. The primary arguments against this tax were that there were already a host of other taxes on autos, (federal, state, and sometimes local gasoline taxes, as well as state and local property taxes, sales taxes, registration fees, etc.), the tax was seen as regressive for those with lower incomes, discriminatory to those that live in a rural environment, and that automobiles should no longer be considered an item of luxury but rather a necessity of modern living. The excise tax on passenger automobiles was repealed effective August 16, 1971.

HISTORY OF THE CURRENT LUXURY EXCISE TAX

[3] To increase revenues, the current luxury excise tax on automobiles was reintroduced with the passage of the Omnibus Revenue Reconciliation Act of 1990 (H.R. 5835, Public Law 101-508). Several other luxury excise taxes were revisited in this law, with excise taxes imposed on boats, aircraft, jewelry, and furs. 1 The excise tax on jewelry and furs was equal to 10 percent of the sales price over $10,000. A 10 percent excise tax was also imposed on the sale price of a passenger automobile over $30,000, the sale price of a boat over $100,000, and the sale price of an aircraft over $250,000. The tax was not imposed if the vehicle was used in a trade or business or if it was used by the federal government or a state or local government for police, fire fighting, emergency medical services, search and rescue, public safety, or public works activity. Under this tax law, luxury excise taxes were expected to generate $1.479 billion over the FY 1991-95 period.

[4] The luxury excise taxes enacted in 1990 were all based on sales prices exceeding statutory amounts, suggesting congressional desire to shift some or part of the overall tax increase to upper- income individuals. Opponents argued, however, that the taxes depressed sales and employment in the affected industries and this actually burdened lower-income workers. The Congress accepted this argument in 1993, repealing all the taxes except that on automobiles in the Omnibus Budget Reconciliation Act of 1993 (H.R. 2264, Public Law 103-66). While not repealing the tax on luxury automobiles, the Congress did provide an inflation adjustment to the statutory sales price. Perhaps the reason why the tax on automobiles was retained was that it was the only one raising significant amounts of federal revenue.

[5] With passage of the Small Business Job Protection Act of 1996 (H.R. 3448, Public Law 104-188), the tax on expensive automobiles was extended but at reduced tax rates. Under that law, the tax for sales after August 28, 1996, was decreased from 10% to 9%. Thereafter, the tax is to be reduced 1% per year through the year 2002 -- at which point it expires from federal tax law. The rationale given for this change was that when the tax expired on January 1, 2000, it "would create an unacceptable disruption of the automobile market. The Congress believed a more gradual phase-out of the tax would be less disruptive to the market and believed it is appropriate to commence the phase-out in 1996." 2

[6] A provision included in the Taxpayer Relief Act of 1997 (H.R. 2014, Public Law 105-34) provides that the luxury tax on passenger vehicles does not extend to the subsequent installation of parts and accessories with an aggregate price that does not exceed $1,000. This provision became effective as of January 1, 1998. The Congress indicated that in the case of a later installation "the owner or operator of the vehicle is responsible for paying the tax attributable to the installation and the installer is secondarily liable. Increasing the de minimis amount should significantly reduce the number of return filers and relieve many persons from the administrative burden of filing an excise tax return reporting a very small amount of tax." 3

[7] Under current tax law, luxury automobiles are taxed when the price exceeds $36,000. Cars which sell for less are not taxed. Thus, the 6 percent tax is applied only to the portion of the sales price which exceeds $36,000. 4 Both the tax rate and the amount subject to tax will be further adjusted in future years.

REVENUES

[8] We have gathered information on revenue collections from the luxury excise tax on automobiles. This excise tax first became effective on January 1, 1991. To date, over $3.1 billion has been collected. Table 1 provides a breakdown of revenues by year. As can be seen the high point in collections was in fiscal year 1996. With the tax rate declining by 1 percent each year and with the base inflation adjusted it can be expected that revenue will continue to drop.

           TABLE 1. Luxury Automobile Excise Tax Collections

 

                       (in thousands of dollars)

 

 

      Fiscal Year                           Collections

 

      1991                                     88,000

 

      1992                                    276,100

 

      1993                                    379,530

 

      1994                                    475,177

 

      1995                                    519,142

 

      1996                                    532,180

 

      1997                                    440,347

 

      1998                                    428,471

 

 

 Source: Information taken from the Internal Revenue Service's,

 

 Statistics of Income Bulletin, Spring 1999, Washington, D.C. 1998.

 

 Table 20. pp. 230-231.

 

FOOTNOTES

 

 

1 For a discussion of the economic issues associated with luxury excise taxes see CRS Report RL30049, Excise Taxation of Luxury Goods: A History and Economic Assessment, by Louis Alan Talley and Dennis Zimmerman.

2 U.S. Congress. Joint Committee on Taxation. General Explanation of Tax Legislation Enacted in the 104th Congress. Washington, U.S. Govt. Print. Off., December 18, 1996. p. 225.

3 U.S. Congress. Joint Committee on Taxation. General Explanation of Tax Legislation Enacted in 1997. Washington, U.S. Govt. Print. Off., December 17, 1997. p. 413.

4 Today's tax threshold amount represents the 1993-enacted base threshold of $30,000 inflation adjusted in rounded $2,000 increments.

 

END OF FOOTNOTES
DOCUMENT ATTRIBUTES
  • Authors
    Talley, Louis Alan
  • Institutional Authors
    Congressional Research Service
  • Subject Area/Tax Topics
  • Index Terms
    luxury autos, excise tax
    high-income taxpayers
  • Industry Groups
    Transportation
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 1999-29347 (3 original pages)
  • Tax Analysts Electronic Citation
    1999 TNT 174-30
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