The Preference Provides | Tax Type | Estimated Biennial Beneficiary Savings |
---|---|---|
A reduction in the sales and use tax paid when purchasing an item (e.g., a vehicle or boat) if the person trades in an item of “like kind” to the seller at the time of purchase.
The reduction is accomplished by subtracting the value of the trade-in item when determining the price that is used to calculate sales or use tax. The preference has no expiration date. |
Sales & Use RCW 82.08.010(1)(a) |
$591.4 million |
Public Policy Objective |
---|
This preference was enacted via Washington’s initiative process rather than legislative action. The initiative language adopted by Washington voters specifically stated the purpose was to reduce the amount on which sales tax is paid by excluding the trade-in value of certain property from the amount that is taxable. JLARC staff infer two additional objectives:
|
Recommendations |
---|
Legislative Auditor’s Recommendation
Review and Clarify: While the preference is achieving the inferred objectives of reducing consumers’ taxes and making Washington’s tax treatment consistent with other states, it is not achieving the inferred objective of stimulating enough additional sales to replace lost revenue. Commissioner Recommendation: The Commission endorses the Legislative Auditor’s recommendation. As the Legislature reviews this preference, the Commission notes that this tax preference is similar to the tax treatment of trade-ins in many other states, due to concerns of double taxation. Additionally, the JLARC staff’s review concludes the $182 million associated with automobile sales is estimated to only generate $31 million in new sales, causing a net loss of $151 million in tax revenue. |
A person pays less in sales or use tax when purchasing an item (for example, a vehicle, airplane, or a boat) if the person trades in an item of “like-kind” to the seller at the time of the purchase. The reduction in sales or use tax is accomplished by “excluding” (subtracting) the value of the trade-in item when determining the price that is used to calculate sales or use tax.
The preference applies only to transactions involving goods, not services, and is limited to situations where:
People with a “like kind” good to trade in towards the purchase of an item paid the same in sales or use tax as purchasers without a trade-in.
Washington voters passed Initiative No. 464 (I-464), which allowed the value of trade-ins of like-kind items to be excluded when calculating the sales tax due on a purchase of goods. I-464 was strongly supported by Washington auto dealers. Other proponents included consumer groups, farm equipment dealers, and boat manufacturers and dealers. I-464 took effect December 6, 1984.
The Department of Revenue (DOR) filed a proposed emergency rule immediately after the initiative passed, clarifying the changes for businesses and consumers. The initiative language did not include a specific trade-in provision for use tax, but DOR interpreted the exclusion to also apply to use tax transactions.
The tax preference has not been substantively altered since it was enacted.
As part of the bill related to the Streamlined Sales and Use Tax Agreement, the Legislature clarified that eligible trade-in property must be “separately stated” in the calculation that determines the selling price.
In addition to reducing sales and use taxes, this preference also reduces collections of motor vehicle (MV) sales tax. Since 2003, people who buy or lease a motor vehicle in Washington pay a MV sales tax of 0.3 percent. Like sales and use taxes, the MV tax is calculated on the selling price of a motor vehicle. This preference reduces that selling price by subtracting the value of the trade-in.
Revenue from the MV sales tax is deposited into the multimodal transportation account which is used for grants to aid local governments in funding projects such as park and ride lots, transit services, and capital projects to improve transportation system connectivity and efficiency.
Auto industry publications indicate that, for U.S. vehicle sales in 2014:
This preference was enacted via Washington’s initiative process rather than legislative action. Its adoption in 1984 preceded the 2013 legislative requirement to include a tax preference performance statement.
The initiative language adopted by Washington voters specifically stated the purpose was “to reduce the amount on which sales tax is paid by excluding the trade-in value of certain property from the amount that is taxable.” The issue was described as an inequity that could be remedied by calculating the sales tax on the “net” price (initial sale price less trade-in value).
JLARC staff infer two additional objectives of the preference based on declarations included directly in the “Statement for” section of the voters’ pamphlet as, as well as newspaper articles and editorials.
The preference is achieving the stated, voter-approved public policy objective of reducing the amount of sales tax paid on purchases when property is traded in. It functions to reduce the “selling price” of such purchases, upon which the sales or use tax is calculated.
The preference achieves the additional inferred objective of making Washington’s tax treatment for trade-in property consistent with many other states that impose sales tax. Forty-one states provide a sales tax exemption on trade-ins, with eleven of these states providing some limits on the amount or type of trade-in. (See the “Other States with Similar Tax Preference?” tab).
While the preference may have stimulated additional sales, JLARC staff estimate the tax revenue generated from these sales does not offset the revenue lost due to the preference.
The analysis presented here focuses on vehicle sales because 82 percent of reported trade-in value in Fiscal Year 2015 was from new and used vehicle transactions. JLARC staff did not estimate results for other types of trade-ins, but their relatively smaller size would not impact the overall conclusion.
To assess the likelihood that the preference stimulated sales and generated enough tax revenue to offset any revenue losses due to the preference, JLARC staff incorporated two factors:
See Technical Appendix tab 1 for more information about the REMI model and Technical Appendix tab 2 for a step-by-step illustration of the calculations.
Below is a series of questions and answers based on the range of elasticities used in the analysis. These estimates are for Fiscal Year 2016. For all elasticities in the range, the amount of sales tax revenue lost due to the preference exceeds the estimated amount of all tax revenue gained from increased sales. This same result held in other fiscal years we modeled.
Questions
answered to reach the conclusion |
If elasticity is -0.2 |
If elasticity is -2.0 |
How
much did the preference reduce the price of a vehicle? |
3.6% |
3.6% |
Based on Department of Revenue and auto industry data
concerning auto sales and trade-ins, a buyer saved an average of 3.6% on the
price of a vehicle purchase involving a trade-in due to the reduction in
sales tax. |
||
How
much did this price reduction stimulate vehicle sales? |
$26.4 million |
$263.8 million |
The estimate of additional sales for FY 2016 varies based
on a range of assumptions of how responsive potential vehicle buyers are to a
reduction in vehicle price. |
||
How
much tax revenue was generated from these additional sales? |
$3.1 million |
$31.3 million |
The estimate of how much additional tax revenue would be generated
in FY 2016 is based on the results of the REMI model and the estimates of
additional vehicle sales in the row above. It includes taxes on vehicle sales directly as well as taxes from the other indirect activities in the economy that occur when consumers increase spending. |
||
How
much sales tax revenue was lost due to the preference? |
$182 million |
$182 million |
The amount is based on an average for fiscal years 2013-2015
for vehicle transactions involving trade-ins, adjusted to FY 2016. The amount does not include trade-ins for
other goods like airplanes, boats, farm machinery, or appliances. |
||
Does
the additional tax revenue generated offset the sales tax revenue lost? |
No. Net loss of $178.9
million |
No. Net loss of $150.7
million |
Estimates of the sales tax revenue lost
exceed estimates of tax revenue gains. Even
with the most optimistic elasticity assumption (-2.0), sales tax revenue lost
is $150.7 million more than the tax revenue gained from additional sales.
|
Information from additional sources suggests that other factors may be bigger drivers of vehicle purchasing decisions than an average 3.6 percent reduction in price. For example, the number of newly registered vehicles (vehicles that have not previously been titled) in Washington varies with more general economic conditions.
Continuing the tax preference will continue to reduce the amount on which sales tax is paid for purchases involving trade-ins and make Washington’s taxation consistent with many other states. While the preference may continue to stimulate some additional sales, it is unlikely to generate additional sales tax revenue to make up the difference in the tax loss due to the preference.
The direct beneficiaries of this preference are people and businesses that purchase goods and trade in like-kind goods at the time of sale. Specific data is not available to determine the number of beneficiaries. For Fiscal Year 2015, new and used vehicles made up the majority (82 percent) of the value of like-kind goods traded in. Other purchases involving trade-ins included recreational vehicles, industrial and farm machinery and equipment, auto parts and tires, boats, motorcycles, and all-terrain vehicles.
New and used automobile dealers are the largest indirect beneficiaries of the preference. The preference may encourage people considering the purchase of a new or used vehicle to do so through a dealership. The trade-in sales tax exclusion is only available if the buyer presents a like-kind item to trade in at the time of sale. People selling their existing vehicles independently do not generally benefit from the preference.
New and used motor vehicle dealers must obtain a license with the Department of Licensing (DOL). As of April 2016, DOL reports there were 400 new motor vehicle dealers and 1,498 used motor vehicle dealers licensed in Washington. JLARC staff identified 838 new and used vehicle sale businesses reporting trade-ins in Fiscal Year 2015.
JLARC staff estimate direct beneficiaries of the trade-in preference saved $239.1 million in Fiscal Year 2015 and will save $591.4 million for the 2017-19 Biennium due to this preference. JLARC staff used Department of Revenue tax return data and Department of Licensing registration data to estimate the beneficiary savings, which are comprised of three components:
Fiscal Year | State Sales/Use Tax | Local Sales/Use Tax | 0.3% Motor Vehicle Tax | Total Beneficiary Savings |
---|---|---|---|---|
2014 | $161,765,000 | $61,058,000 | $5,957,000 | $228,780,000 |
2015 | $168,787,000 | $64,129,000 | $6,221,000 | $239,137,000 |
2016 | $176,008,000 | $67,668,000 | $6,488,000 | $250,164,000 |
2017 | $194,308,000 | $74,704,000 | $7,162,000 | $276,174,000 |
2018 | $204,882,000 | $78,769,000 | $7,552,000 | $291,204,000 |
2019 | $211,243,000 | $81,215,000 | $7,786,000 | $300,244,000 |
2017-19 Biennium | $416,125,000 | $159,984,000 | $15,338,000 | $591,448,000 |
If the tax preference were terminated, individuals and businesses would pay more sales or use tax on purchases of goods where they trade in like-kind goods. Also, people and businesses would pay more motor vehicle sales tax on purchases of vehicles where they trade in a used vehicle
Vehicle dealers likely may see a reduction in sales from an increase in sales price, which could result in a decrease in the number of or amount spent on consumer vehicle purchases.
However, JLARC staff’s analysis indicates termination of the preference would likely result in an overall increase in tax revenue. The reduction in tax revenue from fewer vehicle sales would be more than offset by the additional sales tax collected by removing the trade-in tax preference.
Of the 45 states and the District of Columbia that impose sales and use taxes, five do not provide any form of sales tax reduction for trade-ins: California, District of Columbia, Hawaii, Maryland, and North Carolina.
Thirty states, including Washington, provide a largely unrestricted sales tax exemption for trade-in property. Like Washington, most states that allow a trade-in exemption clarify it is for “like kind” property.
Eleven states provide a trade-in exclusion that is limited in some manner. Most of these are for motor vehicles. Some states also allow a trade-in exclusion for watercraft, vessels, or farm machinery. Ohio provides a trade-in exclusion for new (but not used) vehicle or watercraft purchases.
JLARC staff used Regional Economic Models, Inc.’s (REMI) Tax-PI software (v 1.7.105) to model the economic impacts for three tax preference reviews in the 2016 report: trade-ins, timber, and data centers.
REMI software is used by 34 state governments and dozens of private sector consulting firms, research universities, and international clients.
Tax-PI is an economic impact tool for evaluating the fiscal and economic effects and the demographic impacts of tax policy change. The software includes various features that make it particularly useful for analyzing the economic and fiscal impacts of tax preferences:
The REMI model accounts for the direct, indirect, and induced effects as they spread through the state’s economy, which allows users to simulate the full impact of tax policy change over time.
The REMI model produces year-by-year estimates of the total statewide effects of a tax policy change. Impacts are measured as the difference between a baseline economic and revenue forecast and the estimated economic and revenue effects after the policy change.
The REMI model is a macroeconomic impact model that incorporates aspects of four major economic modeling approaches: input-output, general equilibrium, econometric, and new economic geography. The foundation of the model, the inter-industry matrices found in the input-output models, captures Washington’s industry structure and the transactions between industries. Layered on top of this structure is a complex set of mathematical equations used to estimate how private industry, consumers, and state and local governments respond to a policy change over time.
While the model is complex and forecasting involves some degree of uncertainty, Tax-PI provides a tool for practitioners to simulate how tax policy and the resulting industry changes affect Washington’s economy, population, and fiscal situation.
One inferred objective of the tax preference for trade-ins is to stimulate sales and offset any possible loss of revenue caused by the preference. The conclusion of this review: While the preference may have stimulated additional sales, JLARC staff estimate the tax revenue generated from these sales does not offset the revenue lost due to the preference.
This technical appendix provides more detail on the approaches and calculations JLARC staff used to reach that conclusion. The analyses focused on vehicle sales because 82 percent of reported trade-in value in Fiscal Year 2015 was from new and used vehicle transactions. JLARC staff evaluated net revenue impacts using three approaches:
The results from all three approaches support the conclusion that tax revenue generated by any additional vehicle sales does not offset the revenue lost due to the preference.
REMI’s Tax-PI model allows users to model policy changes and analyze the estimated impacts to the Washington economy, both in terms of economic activity and government finances. (See Technical Appendix 1 for an overview of the REMI model.)
Prior to running modeling scenarios, users must make a series of choices about how to set up the modeling environment by building a state budget and calibrating the model accordingly. JLARC staff used the November 2015 revenue estimates produced by the Economic and Revenue Forecast Council (ERFC) and budgeted expenditures for FY 2014 and 2015, as reported by the Legislative Evaluation and Accountability Program (LEAP) Committee. This data represents the budget and revenue data in the model and serves as the “jump off” point for Tax-PI’s economic and fiscal estimates. Because Tax-PI is a forecasting tool, JLARC staff was unable to model the economic impact of the tax preference beginning in 2006.
In addition to establishing a budget and inputting expected revenue values, users must specify whether government expenditures are determined by demand or revenue. “By demand” imposes a level of government spending in future years that is necessary to maintain the same level-of-service as the final year in which budget data is entered whereas “by revenue” ties government expenditures to estimated changes in revenue collections.
Users may also elect to impose a balanced budget restriction or leave the model unconstrained. The balanced budget feedback forces revenue and expenditures to be equivalent and thus may impose some limitations on economic activity.
By setting expenditures to be determined by demand, users avoid making assumptions about how policymakers may alter spending priorities in the future. In addition, users essentially establish the current budget allocation as carry-forward levels for each expenditure category.
JLARC staff ran the reported scenario with expenditures set to be determined by demand and with the balanced budget feedback option turned on.
The REMI model comes with historical economic and demographic data back to 1990. The data comes from federal government agencies such as the U.S. Census Bureau, U.S. Energy Information Administration, the Bureau of Labor Statistics, and the Bureau of Economic Analysis. As described above, current revenue and expenditure data for Washington comes from ERFC and LEAP, respectively. The data used to build the modeling scenario described in section three is from JLARC staff estimated beneficiary savings based on Department of Revenue (DOR) tax records.
JLARC staff used REMI to evaluate the economic and revenue response to a change in the price of new and used vehicles. Specifically, JLARC staff modeled a scenario simulating the lowering of vehicle prices for consumers and decreasing government spending by the amount of the estimated beneficiary savings. The analysis compared the effects of increased tax revenue associated with increased consumer spending with the foregone tax revenue resulting from the preference and reduced government spending.
In this approach, JLARC staff changed the following policy variables in REMI:
Table 1 shows the REMI results for the changes to these three policy variables for Fiscal Years 2015-2020. The price change affected consumers’ purchasing power for vehicles, and includes the substitution effect that simulates consumers changing demand for one good based on a change of price of another good. The reduction in the price of automobiles increased purchases of autos while decreasing purchases of other goods. In contrast, government spending declined.
Table 1 - Policy Variable Changes (in Millions of Dollars) |
||||||
---|---|---|---|---|---|---|
Fiscal Year | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 |
Consumer Price - New Motor Vehicles | -$125.1 | -$126.6 | -$129.2 | -$131.1 | -$133.4 | -$136.7 |
Consumer Price - Net Purchases of Used Motor Vehicles | -$49.9 | -$55.4 | -$62.0 | -$67.4 | -$71.9 | -$75.3 |
Government Spending | -$175.0 | -$182.0 | -$191.2 | -$198.5 | -$205.3 | -$212.0 |
REMI then allows a user to calculate the net revenue changes associated with the effects shown in Table 1. Table 2 shows the estimated net revenue effect of the trade-in deduction for Fiscal Years 2015-2020. The REMI analysis includes the net revenue effect of lower consumer prices and lower government spending, while the beneficiary savings represents the foregone revenue due to the tax preference.
Although the vehicle price reduction did result in an increase in vehicle sales, and therefore an increase in sales tax revenue, the gain was more than offset by the loss of sales tax revenue due to the preference and the reduction in government spending.
Table 2 - Net Revenue Effect (in Millions of Dollars) | ||||||
---|---|---|---|---|---|---|
Fiscal Year | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 |
Revenue Change - REMI Analysis | $12.2 | $25.6 | $27.6 | $29.0 | $30.2 | $31.4 |
Revenue Decrease - Beneficiary Savings | -$175.0 | -$182.0 | -$191.2 | -$198.5 | -$205.3 | -$212.0 |
Net Revenue Effect | -$162.8 | -$156.4 | -$163.6 | -$169.5 | -$175.1 | -$180.6 |
A limitation of this approach, however, is that REMI users are not able to change the price elasticity of demand for vehicles. Instead, this is a fixed value in the REMI model of approximately -1.65. As such, modeling the price change of new and used vehicles in REMI would use that elasticity. In order to evaluate the effects of the tax preference using various assumptions for the price elasticity of demand for vehicles, JLARC staff developed two different approaches, both of which used the concept of price elasticity of demand.
Approach #2 focuses on sales tax revenues and introduces the concept of consumer responsiveness to changes in vehicle prices.
To approximate a potential response of vehicle sales to a tax preference that effectively reduces vehicle prices, JLARC staff used price elasticity of demand, the measure of responsiveness of the quantity demanded of a good or service to a change in its price. Specifically, the values of elasticities in this report refer to the percentage change in quantity demanded in response to a one percent change in price.
Price elasticities with an absolute value less than 1 are considered inelastic (purchases deemed essential and/or without adequate substitutions available) whereas absolute values greater than 1 are elastic (purchases may be delayed or substitutions are available). A value of 1 indicates unit elasticity or an equivalent percent change in quantity purchased relative to the percent change in price. The price elasticities of demand included in this analysis are negative, indicating a decrease in price would result in an increase in demand.
The price elasticity of demand for vehicle purchases is not a definitively established amount, as there are many variables that potentially impact consumer behavior. For example, the elasticities associated with vehicle sales vary due to factors such as geography (urban vs. rural), make and model of automobile, and year (new vs. used). JLARC staff reviewed literature and found that various studies have arrived at a wide range of price elasticities of demand, and this analysis therefore presents a range of elasticities informed by that review.
JLARC staff approximated the effect that a price change resulting from a reduction in sales tax could have on demand for vehicles. Rather than assigning one elasticity for the estimate, JLARC staff calculated potential changes in demand and, consequently, vehicle purchases, based on the range of elasticities found in the literature. The range of elasticities used in this analysis is -0.2, -0.5, -0.8, -1.0, -1.2, -1.5, -1.8, -2.0. See the list of references at the end of this appendix for the literature JLARC staff reviewed in developing this range.
Because the price elasticities of demand described above indicate responsiveness to changes in price, the next portion of the analysis required estimation of the percentage change in the price of vehicles that involved a trade-in that can be attributed to the trade-in deduction. This percentage change in vehicle prices is multiplied by the range of elasticities to estimate the percentage change in vehicle demand. This change, in turn, is multiplied by a base amount of taxable sales and to estimate the additional vehicle sales stimulated by the change in price.
To estimate the percentage change in price, JLARC staff used Fiscal Year 2013-2015 data reported to the Department of Revenue (DOR) by automobile dealerships for taxable sales and for reported deductions pursuant to the trade-ins tax preference.
Table 3 - Estimating Trade-in Share of Total Vehicle Sales | |||
---|---|---|---|
Category | % of Sales | Trade-In Share | Total Share |
New | 65.0% | 48% | 31.2% |
Used | 35.0% | 29% | 10.1% |
Trade-In Share of Total Auto Sales 41.4% |
Table 4 - Sales Tax Rates | |||
---|---|---|---|
State | Local | MV Tax | Total |
6.5% | 2.48% | 0.3% | 9.28% |
Table 5 - Estimating Base Vehicle Spending | ||||||||
---|---|---|---|---|---|---|---|---|
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8
|
|
Fiscal Year |
Taxable Sales |
Parts/ Service Adj. |
Taxable Vehicle Sales |
Deduction |
Total Vehicle Sales |
Total Trade-in Sales |
Total Trade-in Sales Tax |
Total Trade-in Vehicle Cost |
2013 | $9,050,005,038 | -11.4% | $8,018,304,464 | $1,816,820,555 | $9,835,125,019 | $4,067,035,106 | $377,420,858 | $4,444,455,964 |
2014 | $9,909,834,610 | -11.4% | $8,780,113,464 | $1,887,511,267 | $10,667,624,731 | $4,411,291,590 | $409,367,860 | $4,820,659,450 |
2015 | $10,802,529,048 | -11.4% | $9,571,040,737 | $1,955,421,731 | $11,526,462,468 | $4,766,439,412 | $442,325,577 | $5,208,764,989 |
Average | $9,920,789,565 | -11.4% | $8,789,819,555 | $1,886,584,518 | $10,676,404,073 | $4,414,922,036 | $409,704,765 | $4,824,626,801 |
Table 6 - Estimating Price Change due to Deduction | ||||
---|---|---|---|---|
9 |
10 |
11 |
12 |
|
Fiscal Year |
Deduction |
Sales Tax Difference |
Total Trade-in Vehicle
Cost |
Price Change % |
2013 | $1,816,820,555 | -$168,600,948 | $4,444,455,964 | -3.79% |
2014 | $1,887,511,267 | -$175,161,046 | $4,820,659,450 | -3.63% |
2015 | $1,955,421,731 | -$181,463,137 | $5,208,764,989 | -3.48% |
Average | $1,886,584,518 | -$175,075,043 | $4,824,626,801 | -3.63% |
JLARC staff multiplied the price change percentage with the various price elasticities to estimate a range of percent demand changes, which are shown in table 7.
Table 7 - Estimated Percent Demand Changes | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|
Fiscal Year |
Price Change % |
-0.20 |
-0.50 |
-0.80 |
-1.00 |
-1.20 |
-1.50 |
-1.65 |
-1.80 |
-2.00 |
2013 | -3.79% | 0.76% | 1.90% | 3.03% | 3.79% | 4.55% | 5.69% | 6.26% | 6.83% | 7.59% |
2014 | -3.63% | 0.73% | 1.82% | 2.91% | 3.63% | 4.36% | 5.45% | 6.00% | 6.54% | 7.27% |
2015 | -3.48% | 0.70% | 1.74% | 2.79% | 3.48% | 4.18% | 5.23% | 5.75% | 6.27% | 6.97% |
Average | -3.63% | 0.73% | 1.81% | 2.90% | 3.63% | 4.35% | 5.44% | 5.99% | 6.53% | 7.26% |
These percentages were multiplied with base taxable sales to estimate a range of marginal taxable sales, shown in table 8.
Table 8 - Estimated Marginal Taxable Sales(in Millions of Dollars) | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|
Fiscal Year |
Base Taxable Sales |
-0.20 |
-0.50 |
-0.80 |
-1.00 |
-1.20 |
-1.50 |
-1.65 |
-1.80 |
-2.00 |
2013 | $3,315.7 | $25.2 | $62.9 | $100.6 | $125.8 | $150.9 | $188.7 | $207.5 | $226.4 | $251.6 |
2014 | $3,630.8 | $26.4 | $66.0 | $105.5 | $131.9 | $158.3 | $197.9 | $217.7 | $237.5 | $263.9 |
2015 | $3,957.8 | $27.6 | $68.9 | $110.3 | $137.9 | $165.5 | $206.8 | $227.5 | $248.2 | $275.8 |
Average | $3,634.8 | $26.4 | $65.9 | $105.5 | $131.9 | $158.2 | $197.8 | $217.6 | $237.4 | $263.7 |
The exercise above led to an estimate of the increase in vehicle sales associated with each of the elasticities in the range.
The last step was to calculate the sales tax revenue gains for each of the increases in vehicle sales, then compare these to the sales tax revenue that is foregone due to the trade-in preference.
JLARC staff averaged the marginal sales estimated for Fiscal Years 2013, 2014, and 2015 for each value of elasticity above. Multiplying these values by a tax rate of 9.28 percent (Table 4) yields estimated marginal sales tax revenues.
The tax rate comprises the 6.5 percent state rate, an estimated average local sales tax rate of 2.48 percent, and a 0.3 percent motor vehicle tax pursuant to RCW 82.08.020(3) that is deposited in the multimodal transportation account.
The marginal revenue amounts are compared with the offsetting revenue cost of the preference, averaged for FY13-FY15, with a growth rate applied for FY16. The growth rate reflects growth in personal consumption expenditures for new and used vehicles in REMI’s baseline forecast.
The results of this analysis are shown in Table 9. For every elasticity in the range, the sales tax revenue lost exceeds any sales tax revenue gains.
Table 9 - Estimated Marginal Sales Tax Revenue - Tax Rate - FY16 (in Millions of Dollars) | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|
Fiscal Year |
Tax Rate |
-0.20 |
-0.50 |
-0.80 |
-1.00 |
-1.20 |
-1.50 |
-1.65 |
-1.80 |
-2.00 |
2013 | 9.28% | $2.33 | $5.84 | $9.34 | $11.67 | $14.01 | $17.51 | $19.26 | $21.01 | $23.35 |
2014 | 9.28% | $2.45 | $6.12 | $9.79 | $12.24 | $14.69 | $18.36 | $20.20 | $22.04 | $24.49 |
2015 | 9.28% | $2.56 | $6.40 | $10.24 | $12.80 | $15.35 | $19.19 | $21.11 | $23.03 | $25.59 |
Average | 9.28% | $2.45 | $6.12 | $9.79 | $12.24 | $14.68 | $18.36 | $20.19 | $22.03 | $24.47 |
Estd. Beneficiary Savings | -$182.0 | -$182.0 | -$182.0 | -$182.0 | -$182.0 | -$182.0 | -$182.0 | -$182.0 | -$182.0 | |
Net Revenue | -$179.6 | -$175.9 | -$172.2 | -$169.8 | -$167.3 | -$163.6 | -$161.8 | -$160.0 | -$157.5 |
Approach #3 combines the range of elasticities from Approach #2 with use of the REMI model. Approach #2 is limited because it only captures potential marginal revenue attributable to the sales tax on vehicles, and not dynamic revenue impacts from other taxes or other economic activity supported by the additional vehicle purchases. JLARC staff used REMI to estimate this dynamic impact of the marginal auto sales. As in Approach #2, the marginal revenue amounts are compared with the offsetting revenue cost of the preference, averaged for FY13-FY15, with a growth rate applied for FY16. The results of this approach are summarized in the “Are Objectives Being Met?” tab, and they are shown in Table 10. For every elasticity in the range, the sales tax revenue lost exceeds any tax revenue gains.
Table 10
- Estimated REMI Results of Elasticity Analysis (in Millions of Dollars) |
|||||||||
---|---|---|---|---|---|---|---|---|---|
Elasticity | -0.20 | -0.50 | -0.80 | -1.00 | -1.20 | -1.50 | -1.65 | -1.80 | -2.00 |
% Change in Price | -3.6% | -3.6% | -3.6% | -3.6% | -3.6% | -3.6% | -3.6% | -3.6% | -3.6% |
% Change in Demand | 0.7% | 1.8% | 2.9% | 3.6% | 4.4% | 5.4% | 6.0% | 6.5% | 7.3% |
Base Taxable Sales | $3,634.8 | $3,634.8 | $3,634.8 | $3,634.8 | $3,634.8 | $3,634.8 | $3,634.8 | $3,634.8 | $3,634.8 |
Additional Sales from Increased Demand | $26.4 | $65.9 | $105.5 | $131.9 | $158.3 | $197.8 | $217.6 | $237.4 | $263.8 |
Revenue from Additional Sales | $3.1 | $7.8 | $12.5 | $15.6 | $18.8 | $23.4 | $25.7 | $28.1 | $31.3 |
Estimated Forgone Revenue | -$182.0 | -$182.0 | -$182.0 | -$182.0 | -$182.0 | -$182.0 | -$182.0 | -$182.0 | -$182.0 |
Net Revenue | -$178.9 | -$174.2 | -$169.5 | -$166.4 | -$163.2 | -$158.6 | -$156.3 | -$153.9 | -$150.7 |
To build this simulation, JLARC staff amended the policy variable for personal consumption expenditures by the amount of marginal sales calculated for each elasticity value.
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For the purposes of this chapter:
(1)(a)(i) "Selling price" includes "sales price." "Sales price" means the total amount of consideration, except separately stated trade-in property of like kind, including cash, credit, property, and services, for which tangible personal property, extended warranties, digital goods, digital codes, digital automated services, or other services or anything else defined as a "retail sale" under RCW 82.04.050 are sold, leased, or rented, valued in money, whether received in money or otherwise. No deduction from the total amount of consideration is allowed for the following: (A) The seller's cost of the property sold; (B) the cost of materials used, labor or service cost, interest, losses, all costs of transportation to the seller, all taxes imposed on the seller, and any other expense of the seller; (C) charges by the seller for any services necessary to complete the sale, other than delivery and installation charges; (D) delivery charges; and (E) installation charges.
[ 2014 c 140 § 11; 2010 c 106 § 210; 2009 c 535 § 303; 2007 c 6 § 1302; (2007 c 6 § 1301 expired July 1, 2008); 2006 c 301 § 2; 2005 c 514 § 110; 2004 c 153 § 406; 2003 c 168 § 101; 1985 c 38 § 3; 1985 c 2 § 2 (Initiative Measure No. 464, approved November 6, 1984); 1983 1st ex.s. c 55 § 1; 1967 ex.s. c 149 § 18; 1963 c 244 § 1; 1961 c 15 § 82.08.010. Prior: (i) 1945 c 249 § 4; 1943 c 156 § 6; 1941 c 178 § 8; 1939 c 225 § 7; 1935 c 180 § 17; Rem. Supp. 1945 § 8370-17. (ii) 1935 c 180 § 20; RRS § 8370-20.]
Legislative Auditor Recommendation
The Legislature should review and clarify the sales tax exemption for trade-ins because, while the preference is achieving the inferred objectives of reducing consumers’ taxes and making Washington’s tax treatment consistent with other states, it is not achieving the objective of stimulating enough additional sales to replace lost revenue.
Legislation Required: Yes.
Fiscal Impact: Depends on legislative action.
The Commission endorses the Legislative Auditor’s recommendation.
As the Legislature reviews this preference, the Commission notes that this tax preference is similar to the tax treatment of trade-ins in many other states, due to concerns of double taxation. Additionally, the JLARC staff’s review concludes the $182 million associated with automobile sales is estimated to only generate $31 million in new sales, causing a net loss of $151 million in tax revenue.