A recent paper on car rental fees published by the Tax Foundation cites Kansas City, Missouri for its rental car excise fee. As with the earnings tax, Kansas City leaders argue that this is free to residents because we’re taxing people who don’t live here. The paper’s authors refer to this as tax exporting, and it affects the decisions people make:
While tax exporting may succeed in disproportionately burdening nonresidents with a rental car tax, the taxes have negative economic effects for the taxing jurisdiction. In addition to lowering the quantity of car rental services demanded, there is evidence that consumers will travel to lower tax jurisdictions nearby, as was the case when Kansas City, Missouri levied a $4 per day rental car tax. Residents and nonresidents alike traveled across the state line to nearby Kansas, which offered a lower effective tax rate on an ad valorem basis, to avoid the tax in Missouri. This harmed Kansas City, Missouri’s economy, resulting in missed tax revenue, lower output, and potentially lost jobs in the rental car industry.
I myself have gone across the state line to rent a car in Kansas to save money. Many people in the region have done this, I am guessing, and the impact adds up. The paper cites research that put numbers to this behavior regarding rental cars:
Tax scholars William Gale and Kim Rueben found that a $4 per day rental car levy in Kansas City, Missouri—an effective tax rate of about 13 percent on an economy vehicle—reduced the number of customers at affected branches by 9 percent relative to branches that were unaffected. While consumers had less than a proportionate response to the tax, they altered their behavior by using other transportation options.
Kansas City cannot tax its way to prosperity. If city taxes remain high while services remain low, consumers and residents will continue to do what they have been doing: vote with their feet.