By Larry Jones
February 13, 2012

Arlington County (VA) Deputy Commissioner of Revenue Ray Warren told members of the House Subcommittee on Courts, Commercial and Administrative Law during a February 1 hearing on the so called “End Discriminatory State Taxes for Automobile Renters Act of 2011,” H.R. 2469, that the major public interest groups that represent local governments in Washington (DC) – the National Association of Counties, National League of Cities, The United states Conference of Mayors and the Government Finance Officers – oppose the bill because it “poses a dire threat not merely to state and local tax revenues, but to the entire existence of independent state and local taxation authority in our system of federalism.”

He explained that the car rental industry was just one of many claiming that state and local sales taxes are discriminatory in order to convince Congress to ban new taxes on the industry. When examined closely, it is clear these industries are seeking favorable tax treatment. Since Congress approved a similar ban on state and local taxes on Internet access fees in 1998, local government groups have maintained that any industry’s plea for federally mandated favorable tax treatment would open the door to other industries asking for similar exemptions or protections from state and local taxing authority. Over the past year, Warren said the communications industry, hotel industry and now the car-rental industry have asked Congress to preempt state and local taxing authority.

He also criticized the bill for how state and local taxes would be determined “discriminatory,” for its vague language, and for not identifying an administrative agency that can issue interpretative rulings. He cautioned this could lead to “expensive litigation and result in budgetary uncertainty at a significant cost to taxpayers.” Under the bill, he said, “The determination that a tax is ‘discriminatory’ is made without any reference to the factors that state and local policymakers use to evaluate local needs and the best manner to distribute the local tax burden.” Further, it does not take into account offsetting exemptions. For example, Warren said, in Virginia, car rental companies are exempt from the property tax, and from the state sales and use tax which amount to a significant savings.

Several witnesses testified in favor of the bill: National Consumers League Executive Director Sally Greenberg, National Sports Fan Coalition Executive Director Brian Frederick, and Global Business Travel Association Executive Director Michael McCormick. All claimed that the car rental industry is being unfairly burdened with discriminatory taxes that state and local officials use to fund sports stadiums. But Warren pointed out that many state and local governments put revenues from the car rental tax in their general fund, which is used to fund critical services. He also pointed out a flaw in the bill that attempts to compare car rental taxes with taxes levied on all other commercial and industrial taxpayers instead of other retailers. “Yet common sense dictates that different taxes are imposed on retail sales than on manufacturing. Indeed, it is unclear if the ordinary sales tax, a mainstay of local finance, would be held discriminatory if a similar apples to oranges test was applied,” he said.