Auto tax shows how policy affects behavior

Several tax increases proposals have been floated for the special legislative session that’s temporarily on hold. As they consider these measures, Oklahoma’s lawmakers must keep in mind that tax policy changes behavior. A failure to understand this truth has already caused problems.

Since 1935, automobile purchases have been exempted from state sales tax. Instead an excise tax was imposed, which was set at a lower rate than the current sales tax. This year, lawmakers voted to add a 1.25 percent sales tax on top.

The tax was signed into law May 31, and the legislation had an effective date of July 1. By early September, House Majority Floor Leader Jon Echols, R-Oklahoma City, abruptly announced he would file legislation to exempt the trucking industry from the new tax.

Echols declared, “We certainly want to protect the trucking industry in Oklahoma because of their contribution to job growth and economic development in our state. We want to continue to be a primary destination for both large and small companies to tag their long-haul transportation vehicles.”

Gov. Mary Fallin subsequently included car tax revision in her special session call, saying, “I have also provided the legislative authority to clarify our intention that the new 1.25 percent sales tax on vehicles not extend to the trucking industry.”

Why the sudden change of heart? Because the tax changed behavior. National companies with large fleets began doing business in other states. And other states reportedly began recruiting that business, citing the competitive advantage they now hold because of Oklahoma’s new tax.

Some officials have privately indicated state government might even lose money as a result of the tax increase. Thus Echols’ legislation, expected to receive a vote in special session, would exempt from the tax all trucks and truck-tractors registered for combined laden weight of 55,000 pounds or more; trailers and semi-trailers registered as transport cargo vehicles; and frac tanks used in oil and gas exploration.

Similarly, lawmakers voted this year to impose new costs on businesses that sell goods subject to state sales tax. Because those businesses bear increased administrative costs to conduct a service on the behalf of state government, such businesses were previously compensated with an amount equal to 1 percent of their sales tax collections — but only if they submitted their returns on time. Lawmakers voted to eliminate those payments, and there are already reports some owners are changing their business practices in response. There’s also reason to wonder if timely filing of collections will now become an issue since there is no longer a financial benefit associated with it.

In both instances, the tax imposed on businesses was “only” 1.25 percentage points or less. Yet business owners altered behavior in response. In the special session, measures have been filed to increase tax rates by a much larger amount than a 1.25 percentage point increase, including on energy production and Oklahomans’ incomes.

Supporters say those increases won’t cause any reduction in economic activity. The real-world consequences of the car tax suggest otherwise, so lawmakers must seriously review every tax proposal before enacting it.