What is the function of tire taxes?

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TTI resident columnist Joe Walter, considers the role that tire taxes play worldwide.

Different levels of American government (federal, state and local) fund some of their operations through direct and indirect taxes on tires – which are sometimes called fees, duties, surcharges, etc. While federal taxes and duties are uniform throughout the country, state and local taxes vary regionally. Taxes reflect the cost of government operations, but are viewed by many people as the bane of modern civilization. While the concept might seem recent, efficient forms of taxation and tax collection, sometimes onerous, existed thousands of years ago in Egypt, Greece and Rome. Today, a purchaser of tires might ask: How do my tire tax dollars contribute to the government treasury?

There is no value added tax (VAT) in the USA as exists in most other nations. Thus, we have an array of different taxing jurisdictions. For example, 45 of the 50 states have a sales tax ranging from 4% to 6.5% on goods and services. Many localities, mainly counties and cities, tack on varying, additional taxes. For example, the combined state and local sales taxes in Chicago are 10.25% – a good place to avoid when buying tires!

Consider that over 300 million new tires are purchased each year nationally. All applicable state and local sales taxes combined conservatively generate US$1.5bn annually to grease the gears of government. These new tire purchases are taxed as ‘goods’ and do not include ‘service’ taxes such as those incurred by tire rotation, mounting and/or balancing – a sizeable source of profits for automotive service providers and another significant source of revenue for authorities.

Additionally, in most states, one more tax is applied to the purchase of every new tire, producing funds that are used to address environmental concerns – as tires are not biodegradable. Fees range from 25 cents to US$5 per tire and may vary based on tire size and other factors. Separate from this recycling fee, tire dealers’ disposal fees are imposed. These fees are usually collected by the retailer to fund scrap tire collection and disposal. Consider that Americans replace more than 300 million worn-out tires annually. Thus, these supplementary ‘non-sales’ taxes generate hundreds of millions of dollars of revenue each year. However, overall tire recycling efforts seem to have been successful as about 1 billion scrap tires existed in US stockpiles in 1990; today, perhaps 70 million remain – a 93% reduction.

Then we have the issues of federal tariffs, import quotas and other indirect forms of taxation paid by tire importers – and ultimately consumers. For example, in 2015, the US International Trade Commission determined that Chinese passenger and light truck tire imports were causing material injury to the domestic tire industry. The Commerce Department then assessed countervailing duties ranging up to 100% and antidumping duties up to 88%. Altogether, these fees amounted to an added cost burden principally borne by low-income Americans, who were forced to pay more for their entry-level tires – a regressive form of taxation (see my column in TTI, October 2014, goo.gl/jVaYfA).

The first ever federal excise tax on tires was levied uniformly throughout the country in 1918 mainly because of the revenue requirements of World War I. Today, excise taxes are also in place on motor fuel, alcohol and tobacco products. The tire excise tax has a checkered history and has been in place on-and-off as needed to fund, for example, World War II expenses, and later, interstate highway construction. The premise for the federal tax on tires seems valid: this tax only applies to tires with load capacities in excess of 3,500 lb (1,589kg) as heavier vehicles cause greater damage to both roads and bridges than automobiles. Thus, this fee functions as a pricing mechanism for funding highway wear-and-tear charges (see my column in TTI, October 2015, goo.gl/HrZc5Q).

In total, tire consumer taxes are a significant source of revenue for government coffers, but are dwarfed by other forms of taxation in the highway transportation sector alone – such as the federal excise tax on motor fuel and the state sales tax on new/used vehicle purchases. Plus, all of us experience never-ending taxes on income, property, gifts, hotel stays, etc – and even death!

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