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How would the Governor’s Proposal to Freeze the Phase-out of the Motor Vehicle Tax Program Affect Communities?

The Governor has proposed to freeze the program to phase-out the excise tax on motor vehicles. The Governor’s FY 2002 Budget Request does not include the necessary funding to finance the next step in the program, which would reimburse communities for exempting $5,000 in motor vehicle value in FY 2003. The Governor has included $73.4 million in the FY 2002 budget to freeze the program at $3,500 exemption level (an additional $1.4 million is included to continue the elimination of the tax levied by fire districts). Table 3 on the following page displays the State’s reimbursement by community from FY 1999 through and including FY 2002. It includes the estimated amounts by community if the General Assembly were to reject the Governor’s proposal and continue the phase-out of the excise tax on motor vehicles.

The phase-out of the motor vehicle tax needs to be viewed as part of the overall State-local revenue system. First, as detailed later in this report, if the program is frozen as proposed by the Governor, taxpayers will forego approximately $200 million in property tax relief — representing nearly 11.0 percent of all property taxes collected throughout the State. Freezing the program will not resolve the property tax inequities created by the excise tax on motor vehicles. In addition, the funds that would have been used for property tax relief would likely be allocated to other State expenditures, as is recommended in the Governor’s FY 2002 Proposed Budget. These and other issues are discussed in greater detail later in the report.

Freezing the phase-out of the motor vehicle excise tax also impacts how the State finances public schools. It was estimated that the Governor’s FY 2002 Budget would have included an estimated $96.5 million for the fourth year of the phase out of the motor vehicle tax program. However, since freezing the program would require $73.4 million, this theoretically permitted the Governor to shift the $23.1 million "savings" from freezing the motor vehicle phase-out program to increase the amount distributed through State school aid. There are a number of consequences that effect intergovernmental issues resulting from the Governor’s recommendation.