Wednesday, April 1, 2015

Motor Vehicle Sales Tax in Minnesota

The motor vehicle sales tax (MVST) is a 6.5% sales tax largely used for transportation funding in the state of Minnesota. It is exclusively for motor vehicles and is applied to the sale of a motor vehicle in lieu of a general sales tax. The tax base is determined by the sale price of the car less any rebate or trade-in vehicle value.  Certain users, uses, and vehicles are exempt from paying the MVST (for example, off-road vehicles are taxed with the general sales tax instead). Passenger vehicles that are 10 years or older or are valued at less than $3,000 are not subject to the MVST but instead pay a $10 tax.

Initially, MVST funds were directed to the general fund and used for various transportation purposes.  In 2002, legislative changes introduced a cap on the amount of revenue collected from the motor vehicle registration tax or “tab fees” and eliminated local property taxes as a major source of transit funding. In response, a greater share (~31%) of the MVST was directed to the Highway User Tax Distribution Fund from the general fund. In 2006, voters approved a constitutional amendment dedicating all MVST funds to transportation purposes. The amendment included a ceiling for funding directed toward state and local highway spending (60%) and a floor for establishing the minimum percent to be allocated to public transit assistance (40%).

Generally, the necessity of automobile purchases and the near impossibility of evading the tax precludes behavior change. Therefore, MVST is a highly efficient tax.

Equity is a bit more complicated. If we frame equity as connecting the poor or underprivileged to opportunities, then using revenues to subsidize an accessible transit system is equitable. However, some could argue whether the transit system is equitable or not by looking at the focus of major transportation investments. Still, there are obvious shared social, environmental, and mobility benefits that benefit riders and non-riders (least of which is the reduced congestion on roads to the growing prevalence of “riders of choice”).

Perhaps the weakest criteria for MVST is revenue adequacy.  The amount of revenue generated from MVST fluctuates largely from year to year as it is tied directly to the number and value of vehicles sold each year.  Factors such as gasoline price or the health of the economy have an impact on the number of miles driven and the number and value of cars sold in a given year.  

MVST is easy to collect and administer.  In Minnesota, the various taxes, fees, and penalties are listed line by line with a subtotal on the Vehicle Registration document. An average consumer may or may not differentiate the different components of their motor vehicle sales tax and fee subtotal. Since the consumer typically spends the bulk of their mental energy negotiating the price at the time of purchase (which determines their monthly payments), the final tax rate may seem less onerous and more of an afterthought (although neither of us has purchased a car ourselves, so we can’t speak personally).
Further Reading:

Forbes’ interesting comparison of most and least expensive states to purchase a car:
Carsdirect – inadvertently humorous recommendations to “avoid” the tax (hint: relocate to a state that doesn’t collect it):
Minnesota Department of Public Safety: breakdown of MVST:
“Short Subjects: Motor Vehicle Sales Tax.” – a 2-page history of the MVST:
Governor Dayton’s budget proposal synopsis:

Metro Transit budget Facts:

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