R Sheet on Rental Car Taxes


C. Jarrett Dieterle
Resident Senior Fellow, Competition Policy
Nick Zaiac
Former Associate Fellow

Key Points

The rental car market is decentralizing, and tax codes associated with the market are becoming outdated.

Rental car taxes should be assessed based on how a car is used, not the entity that owns the vehicle.

High rental car taxes punish people who can legally drive but live car-free, namely the working poor.

Low, use-based taxes would level the playing field between rental fleet owners and individuals who rent their cars on peer-to-peer platforms.

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As long as Americans have owned cars, citizens have made money renting them to each other—from one-off transactions between friends and neighbors to the advent of formal rental car businesses. For almost as long, governments have taxed and regulated these transactions to protect public safety and raise funds for infrastructure like roads.

Typically, governments focused their tax and regulatory efforts on rental car firms. This makes sense, because historically, formal businesses with stationary car lots have administered these transactions more easily than individual citizens. But with the advent of internet rental platforms and cheap, camera-equipped phones, the rental car market is decentralizing. This creates problems for legacy tax and regulatory regimes, forcing decision-makers to consider how best to adapt rules to fit the new rental car economy.

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