The Motor Vehicle Excise Tax

 

Contents

Introduction
Tax Rates and Administration
The State Distribution

 

Introduction

At one time the tax Hoosiers most loved to hate, the motor vehicle excise tax is an annual charge on the value of automobiles, motorcycles and light trucks.  The payment schedule varies by 17 classifications of vehicle price when new, and ten classifications of age.  Payments vary from $12 per vehicle per year for the oldest, cheapest vehicles, to $532 for a new vehicle priced above $42,500.  Revenue is collected by the Bureau of Motor Vehicles and its license branches, and distributed to all local units based on property tax rates.  A taxpayer's excise tax payment is distributed among the local units in which he or she lives in the same proportions as the taxpayer's property taxes.  All local units receive the tax, including school corporations.  It is a general revenue source, not a tax devoted to road repair and construction.

The tax was especially disliked by Indiana taxpayers, perhaps because it was a lump-sum annual payment out of current income, and because it made registering newer, more expensive vehicles more costly in Indiana than in most states.  In 1996, however, the state cut excise tax rates for the average vehicle almost in half.  For example, the rate on a new vehicle priced at more than $42,500 was cut from $1,063 to $532; the rate on a three year old vehicle originally worth $11,000 was cut from $230 to $115.  Rates for vehicles originally priced under $4,000, and for vehicles more than ten years old, were cut less than 50%.  The minimum payment of $12 was unchanged.  This tax cut has probably taken the edge off the objections to this tax.  Now, however, local governments are unhappy.  The state pays about $240 million per year out of lottery and riverboat gaming revenue to local governments, to replace lost motor vehicle excise tax revenue.  This figure is capped, so the difference between what would have been raised under the old rates, and what is raised under the new, is not fully funded.  The shortfall grows every year.

 

Links to More Information

To Find: Go To:
Bureau of Motor Vehicles.  Though they collect the tax, they make little mention of it on their website. Bureau of Motor Vehicles website

 

Tax Rates and Administration
Motor vehicle excise taxes are collected by the Bureau of Motor Vehicles (BMV) and the license branches, so that
vehicle owners pay the tax in the same place and at the same time as they register their vehicles.  For most vehicles the excise tax is the largest part of the annual BMV payment, but there are additional license and registration fees that are paid at the same time.

The excise tax rate schedule is actually a table of 17 classes of vehicles, with class based on value when new, and 10 age categories.  There are 170 different rates, depending on the value when new and the age of the vehicle.  The lowest rate is $12.  Vehicles ten years old and older costing $15,000 or less when new pay this lowest rate.  Some less expensive vehicles pay $12 when newer than ten years old.  The highest rate is $532.  New vehicles valued at $42,500 or more pay this amount.  

The rate table may seem arbitrary, but it can be understood as a kind of property tax on the current (depreciated) value of the vehicle.  A vehicle worth $20,000 when new, for example, pays an excise tax of $250 in its first year.  This is a tax rate of 1.25%.  New car tax rates for vehicles in most value classes are about 1.25%.  The payment on at $20,000 car in the second year is $217.  This can be thought of as a 1.25% rate on the depreciated value of the car.  The rate table implies that the value of a $20,000 car after one year is $17,360 (that is, 1.25% of $17,360 is $217).  This is a depreciation rate of about 13%.  The rate table is built assuming that depreciation continues at about 13% per year for two to four years, then accelerates.  

So, the motor vehicle excise tax is a 1.25% tax on the depreciated value of the vehicle, with a $12 minimum.

Motor vehicle excise taxes are collected by the county license branches, but the tax revenue belongs to the local governments. License branches turn over the excise tax revenue to the county treasurers each month. License branches receive $1.15 per vehicle for performing this collection service for local governments. This payment is subtracted from the local governments' receipts, not added to the taxpayer's payment. 

County treasurers deposit the excise tax revenue into a special fund.  Twice a year, in June and December (at the same time as property taxes), county auditors determine how much to distribute to each local government in the county. The county, townships, cities and towns, school corporations, library districts, and other special districts share in excise tax revenue. Revenue is divided among the county, township, city or town, school corporation other jurisdictions where each vehicle owner resides.  The division is based on the distribution of property tax payments to those jurisdictions.  That is, if 20% of the taxpayer's property tax payment goes to the county, 20% of the motor vehicle excise tax payment does too. Motor vehicle excise tax revenue is not used exclusively for road maintenance and construction.  All local jurisdictions receive a share of the revenue, and can use it for any purpose. 

Links to More Information

To Find: Go To:
The Motor Vehicle Excise Tax rate table This website:  Excise Tax Rate Table
A list of the other fees collected by the Bureau of Motor Vehicles.   Bureau of Motor Vehicles website (click on "Registration Fees")
A table of motor vehicle excise tax revenues by county for calendar year 2001 This website: Motor Vehicle Excise Tax Revenue, 2001
A history of the excise tax, discussing its property tax roots This website:  Motor Vehicle Excise Tax history

The State Distribution
Motor vehicle tax rates have been reduced significantly in the 1990s.  In 1996 many rates were cut in half.  The top rate on the most expensive, newest vehicle, for example, fell from $1,063 to $532.  The $12 minimum on the oldest, cheapest vehicles was unchanged.  Collecting less in taxes from vehicle owners means, of course, that local governments receive less tax revenue.  In 1996 the state allocated revenue from the lottery, from riverboat gaming, and from the general fund to partially replace this lost revenue.  The total amount of revenue replacement has been about $240 million per year since 1996, and is scheduled to continue at this level in the future.  In 2001 local government received about 60 cents in state aid for each one dollar of excise tax payment. 

Each year more vehicles are registered, and the prices of new vehicles increases.  This means that the difference between what the new tax rates raise and what the old pre-1996 tax rates would have raised increases every year.  Yet the state distribution remains approximately the same.  The new tax rates and the fixed distribution have reduced the amount of revenue available to local governments.  This was the intent of the policy when it was created in 1996.

In 2001, local governments received $392 million in excise taxes.  The state distribution was $236 million, so total revenue from the excise tax and its associated distribution was $628 million.  Had the same vehicles been taxed at pre-1996 rates, total excise tax revenue would have been $750 million.  The 1996 policy change reduced local government revenue by $122 million in 2001.  This amount will increase in future years, because the state distribution is capped at about $236 million.  

Put another way, since 1995 total excise tax revenue and state aid has increased 2.2% per year, while revenue under the old rates would have increased 5.3% per year.  By 2001 local revenue was 16% less than it would have been under the old rates.

Links to More Information

To Find: Go To:
A chart showing excise tax revenue and state distributions since 1971 This website:  Motor Vehicle Excise Tax Chart
A comparison of excise tax revenues, state distributions and pre-1996 rate revenue by county for 2001 This website:  Motor Vehicle Excise Tax Revenue, 2001
A history of Indiana's Motor Vehicle Excise Tax, discussion changes in rates and other policy changes This website:  Motor Vehicle Excise Tax history