Renting a Car? Half Your Bill May Be Taxes and Fees

Rental cars are some of the most heavily taxed transactions in the United States. Last year, we estimated the median state rental car taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. was more than 11 percent. Customers in Minnesota, Colorado, and New York were charged an average tax of more than 20 percent for a standard rental car transaction. In many cities, rental car transactions are taxed even more heavily because municipal taxes stack on top of the rates charged by states.

Car rental taxes can vary significantly across the country, both in rate and structure. States and municipalities levy both ad valorem sales taxes and fixed-rate ad quantum taxes (per rental day or per transaction), along with an assortment of other fees. These various taxes combine to create a significant tax burden on car rentals in most states.

In most cases, this burden is in addition to the user fees for transportation that those drivers must pay in the form of gas taxes or other levies. Drivers of rental vehicles must still fuel their vehicles with taxed fuel and pay applicable road fees and tolls. This means that the excise taxes on rental cars tend to double tax drivers of rental cars, or at least over-tax rental drivers compared to local drivers.

Rental car excise taxes are obviously nonneutral, treating similar transactions differently to intentionally shift the burden to nonresidents. They also undermine the transparency of the tax system, both by surprising visitors with exorbitant unexpected fees and hiding some of the true cost of government services from residents. Rental car taxes also increase the complexity of the system, adding to administrative and compliance costs for in-state businesses.

We estimate average rental car fees for the largest 60 metro areas in the US. Our estimates include state and local tax rates. Specifically, our estimates include state sales taxes (standard and rental-car-specific), local sales taxes (again, standard and rental-car-specific), and excise taxes and fees applicable to rental cars. To compare car rental taxes across cities, we calculate the tax a customer would be charged for a 5-day, $50 per day (or $250 total) rental agreement.

Chicago levies the steepest taxes on rental cars among the cities we studied. Despite Illinois imposing one of the lower tax rates on rental vehicles at 5 percent—ranked 35th in our state rankings—the addition of a 15 percent City of Chicago rental tax, a 6 percent Metropolitan Pier and Exposition Authority (MPEA) tax, a 1 percent Cook County Automobile Renting Occupation and Use Tax (ART), and a $0.50 per rental City of Chicago tax, the combined total tax on a Chicago car rental is 27.2 percent, or $68.00 on a $250 5-day rental.

After Chicago, Seattle, Washington (24.8 percent); Denver, Colorado (23.9 percent); Minneapolis, Minnesota (23.3 percent); and Colorado Springs, Colorado (21.9 percent), tax rental cars most heavily. Nine cities have a rental car tax rate above 20 percent.

On the other end of the spectrum, Cincinnati, Ohio, charges the lowest tax on rental cars at 6.5 percent. Detroit, Michigan, and Columbus, Ohio, both levy a total tax of 8.0 percent, tied for the second lowest. St. Louis, Missouri (9.7 percent), Virginia Beach and Richmond, Virginia (10.0 percent), and Washington, DC (10.25 percent), round out the least taxed cities for rental cars that we studied.

We separate airport-specific fees that may be charged in addition to the rental car taxes we report. Airport fees, along with commercial indoor and lot property rents, are negotiated separately at each airport and are often used to fund airport operations. These fees are more like traditional road user fees, such as fuel taxes and highway tolls, in that the funds generated are often directed to the operation of a publicly provided service; road fees support road usage and construction, while airport fees support airport maintenance and operation.

Airport fees are non-trivial expenses. In nearly every case we examined, airport fees exceeded the combined taxes charged on a rental contract. Most airports charge a concession fee of approximately 11 percent, though these concession fees range from a low of 10 percent at Harry Reed International, El Paso International, Tampa International, and Orlando International to as high as 14.29 percent at Newark Liberty International, John F. Kennedy International, and LaGuardia International. Most airports charge additional fees as well, and there are also often additional fees associated with recovering the cost of rental car fleet registration and licensure.

The largest total airport fee is charged at Newark Liberty International, at 40.67 percent—over $101 on a $250 car rental. San Diego International rentals are charged the second highest amount, totaling 35.11 percent, followed by rentals at Norfolk International (32.36 percent) and Charleston International, New Orleans Louis Armstrong International, and Denver International (31.11 percent).

Airports elsewhere charge much less. Of the cities we examined, St. Louis Lambert International Airport and Orange County’s John Wayne Airport tied for the lowest total fee of 11.11 percent, followed by Milwaukee Mitchell International (12.11 percent), Tucson International (12.91 percent), and Long Beach Airport (15.11 percent).

The combined total burden from state and local taxes, airport fees, and other fees on car rentals is more than 25 percent of the sample transaction in every major city we examined, and is more than 50 percent in 5 cities.

In Newark, New Jersey, the combined total burden is 63.80 percent, $159.49 on a $250 rental. This especially high burden results from the airport’s significant fees, the city’s 5 percent excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections., the state’s 6.625 percent sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. , and the state’s $5 per day “Domestic Security Fee” charged on car rentals. After Newark, car rentals are most heavily burdened in Denver, Colorado (55.44 percent), Chicago, Illinois (54.06 percent), and Seattle, Washington (53.32 percent).

Car rentals are, in total, least burdened by taxes and fees in Anaheim, California (25.08 percent), St. Louis, Missouri (26.49 percent), and Tucson, Arizona (28.29 percent).

While exorbitant fees on rental cars may be easier to sell to the state’s voters, who are less likely to need to rent a car in-state, a substantial portion of the rental car market is still comprised of local residents, meaning the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. isn’t entirely exported to nonresidents. In any case, trying to export the tax burden to nonresidents is likely to suppress tourism and other economic activity.

Rather than levying additional taxes on rental cars by trying to export the tax burden to nonresidents, municipalities should enact principled, neutral transportation tax policy that is unlikely to discourage visitors, tourists, and other economic activity.