History of Indiana's Motor Vehicle Excise Tax

Indiana's Motor Vehicle Excise Tax took effect in 1971 as a replacement for the property tax on passenger vehicles. During the 1950's and 1960's, it had become evident that property taxes on these non-business motor vehicles (cars, motorcycles, and small trucks) were too easy to evade. Property taxes had to be paid before a vehicle could be registered, but vehicle owners could sign a certificate in the county courthouse claiming that no property taxes were owed. Since the license branch had no way of knowing whether the claim on the certificate was true, many people were able to register their vehicles without paying their vehicle property taxes. In addition, it was relatively easy to register a vehicle in a neighboring county with a lower property tax rate.

In 1961 the Indiana General Assembly passed a motor vehicle excise tax law to replace the personal property tax on vehicles. But the Indiana Supreme Court declared the elimination of the vehicle personal property tax unconstitutional, because the state Constitution required that the General Assembly provide for "the taxation of all property, both real and personal" (Article 10, Section 1). In November 1966, voters passed a referendum on a Constitutional amendment (with 78% of the vote) to allow for an excise tax in place of the personal property tax. Article 10, Section 1(b) now reads: "The General Assembly may exempt any motor vehicles, mobile homes, airplanes, boats, trailers or similar property, provided that an excise tax in lieu of the property tax is substituted therefore." The 1969 General Assembly passed the law, and it became effective January 1, 1971.

Property tax rates vary among counties, so under the property tax there was an advantage to registering vehicles in a low tax county.  The motor vehicle excise tax rates were made uniform across the state to eliminate this problem.  Excise tax rates originally were based on a property tax rate of $7.50 per $100 assessed value, which was approximately the state average rate.  At the time assessed value for property tax purposes was the actual value divided by three, so excise tax rates were set at 2.5% of the vehicles price when new.  Depreciation was allowed for older vehicles, so that the tax payment declines with the vehicle's age. 

Inflation increased the prices of new cars, especially during the 1970s and early 1980s.  In 1974, 1982 and 1983 new tax rates were added to the rate schedule.  Originally the rate schedule had six classes, with the top class being for new cars costing $5,500 or more.  The highest tax payment was about $200.  In 1974 classes seven through ten were added, putting the top tax payment at $400 on a new car valued at $12,500 or more.  After 1983, the number of classes was increased to 17.  The highest value category was $42,500 or more, and the highest tax payment was $1,063.  

The motor vehicle excise tax was not as easy to evade as the vehicle property tax, but some evasion happened anyway.  Some vehicle owners registered out-of-state to avoid the excise tax. In 1988 it was estimated that 250,000 Indiana vehicles were registered out-of-state, costing local governments about $24 million. The state police were responsible for issuing citations for excise tax evasion, but in 1987 only 69 citations were issued. 

In 1989 the General Assembly attempted to reduce evasion by making the motor vehicle excise tax a "listed tax."  This meant that the State Department of Revenue became responsible for enforcing the excise tax in instances of delinquency or evasion.  In addition, starting in 1989 state income tax forms included two questions asking whether the taxpayer had registered his or her vehicles in another state. Those who had registered out-of-state were asked to explain why.  Vehicle registrations jumped by a couple hundred thousand in the early 1990s, perhaps as a result of these increased enforcement efforts.

The motor vehicle excise tax was never popular with taxpayers, of course.  Payments on new cars in Indiana were among the highest in the nation (though payments on older, cheaper cars were among the lowest).  With the inflation adjusted rates and greater enforcement, the tax became even less popular.  The General Assembly recognized this, and in 1990 cut the tax rates by about 15%.  Lost local revenue was replaced with funds from the then new Indiana lottery.

This tax cut was in effect for only one year, 1991.  The recession of 1990-91 had reduced state revenues, and lottery funds were diverted for state school aid and other state functions.  The motor vehicle excise tax cut was suspended.  It was never reinstated.

Instead, in 1994 the General Assembly passed a different excise tax cut.  Tax payments were to be cut almost 50%, with the cuts phased in over six years beginning in 1996.  By 1996, however, state revenues had recovered, and the whole tax cut was put in place all at once.  The tax payment schedule currently in use dates from 1996.

Lost local revenues were to be partially replaced out of lottery and riverboat gaming revenues, and until 2000, out of general fund revenues.  Legislators argued that motor vehicle excise tax revenue had been increasing more rapidly than inflation--6.6% per year between 1986 and 1995--so local governments could make do with less.  The state distribution was set at about $236 million.  Between 1996 and 2000 the share of state money from the lottery and gaming increased, and the share from the general fund decreased. 

As of 2001, the effective tax cut to vehicle owners was $358 million, about 48% less than the pre-1996 rates.  Combined tax and state distribution revenues to local governments were $122 million less than locals would have received under the old rates, about 16%.  This amount will continue to increase in future years because the state distribution is capped at about $236 million. 

And that brings us to the present.