The Arkansas Auto Tax Rip-Off

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In the long
and glorious history of taxation, some of the state's plunder outshines
its routine thieving, if only for the audacity factor. My wallet
was suddenly lightened by an unexpected $300 the other day when
I visited those nice young ladies at the local revenooers office.

You see, I
was visiting my son and his family near Austin, Texas when I saw
a dealer ad for $11,000 off Dodge Rams. Well, let's go down and
look and, sure enough, I bought a bright red 2007 Dodge Ram 1500
Quad Cab pickup (yes, it's got the Hemi!). But then came registration
of the vehicle in Arkansas where I have lived for the last four
years, and "settling up" on taxes. It makes no difference
in this tale of tax woe where I had purchased the truck — Texas,
Arkansas or Timbuktu — as long as I must register it in Arkansas.

The posted
MSRP was $33,040 and that was fluffed up by a dealer add-on of some
$1,000+ in claimed paint and fabric protection and other nonsense.
According to the dealer's bill of sale, our verbally agreed-upon
price devolved from over $34,000 this way: a dealer discount dropped
it to a so-called sales price of $28,235 and then the $5,000 customer
rebate from Dodge reduced the "net sales price" to $23,235.
OK, that was a good deal, a solid $10,000 off and I agreed to pay
$23,235 for the truck, plus the familiar TTL the government clips
us all for. Heck, I paid $19,200 for a far more modest Ford F150
back in 1998. That amounts to no auto price inflation whatsoever
in my 9 years between new vehicles.

So how much
was the sales tax? The dealer calculated what to send to Arkansas
at six percent of the net sales price of $23,235, or $1,394.10 billed
to me. That was the right tax liability if I had still lived in
Texas, where the auto sales tax is six percent too and the tax base
is the net sales price the customer actually pays. Naturally, I
expected the same from Arkansas but, alas, no such luck. In Arkansas
the 6% tax applies to the higher "sales price" of $28,235
before the manufacturer's rebate is applied. That boosted my tax
liability up to $1,694.10, a tidy $300.10 jump in revenue for the
darlings over at the Arkansas state government. Ka-ching! It warms
my heart that the $300.10 they took will buy some nice lunches for
the elect in the state capitol. I suppose I should feel grateful
that the state did not tax me on the posted sticker price of $34,000+!

What a raw
deal! The Arkansas state government forces me to pay sales tax on
a price I never paid! And when I and other auto buyers decide to
spend some of the money we "saved" through "rebates"
on which we already have paid sales taxes, retail merchants collect
more sale tax from us to ship over to Little Rock. Two ways of milking
the cow goes down creamy smooth for those who live off taxes.

little me, it turns out that this practice of collecting sales taxes
on higher prices than consumers actually pay is widespread. “I don’t
think people really realize how all this discount stuff works,”
said tax consultant Pat Pelino in 2005 to the Washington
. Since states want to protect their tax base, she said,
“they love to get you coming and going.”

The tax
"multiplier" from auto rebates is a practice carried over
from the treatment of manufacturers' coupons on groceries and related
items, where consumers often pay full retail price and the associated
sales tax, send in a coupon and get a rebate to bring down their
"net price" but never recover the higher sales tax they
already paid. These itty-bitty rebates only total about $3 billion
nationally each year but auto rebates run closer to $30 billion.
If only half of auto rebates are taxed at six percent rate, state
governments rake off a tidy $900 million annually on phantom retail

is no art which one government sooner learns of another," Adam
Smith observed in 1776, "than that of draining money from the
pockets of the people." More to the point is what they say
in Albania: fire, water and governments know no mercy.

5, 2007

Reynolds, Ph.D. [send him
], is professor emeritus at Texas A&M University and former
director of the Criminal Justice Center at the National Center for
Policy Analysis headquartered in Dallas, TX. He served as chief
economist for the US Department of Labor during 2001–2, George
W. Bush’s first term. Visit his
new website

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