Gwinnett’s Game of Shadows

I am sure glad I don’t live in Gwinnett County. This is absolutely embarrassing.

The Gwinnett County Commission voted unanimously Tuesday to approve a tax on vehicle rentals to help pay for the county’s new baseball stadium.

The $600,000 a year the tax is expected to generate will help pay off $33 million in debt the county will incur to build a stadium for the Atlanta Braves’ top minor-league baseball team. [Emphasis added]

Kudos to the Gwinnett County Commission for having the guts to support something that is clearly an AWFUL policy decision with almost no public discussion or debate. All of the secrecy that surrounds this move makes it clear that the fix was in for this deal long ago.

While Gwinnett residents were celebrating the holidays, the commissioners were meeting behind closed doors to get the Braves to Gwinnett. And like the Grinch, the Braves took everything, including the log for the fire. The Commission played the part of Cindy Lou Who—the naive two-year-old who is willing to believe the intruder was doing her a favor by taking her family’s Christmas tree. Here is how I imagine that the deal went down.

Commissioner 1: How will we pay for this stadium? We’ve given the Braves every last revenue stream that isn’t symbolic: tickets, concessions, advertising, sponsorships, even the concessions at the limited number of events that we are allowed to hold?

Commissioner 2: Well, some cities tax rental cars?

Commissioner 3: Is that a good idea?

Commissioner 4: Man, I really want the Braves to have team here.

Commissioner 5: Then it’s unanimous!

If the commissioners had paused a moment to look at the evidence, they would see what a horrible idea taxing rental cars is. In 2006, economists William Gale and Kim Rueben conducted a study of the car rental tax in Kansas City, and the results are not supportive.

Using complete Kansas City customer data from Enterprise Rent-A-Car (the largest car rental company in Kansas City and the country), we tracked all of the company’s rental car transactions in the Kansas City market between January 1, 2002, and June 30, 2005, and employed a simple and robust difference-in-difference methodology to obtain several key results.

The methodology seems sound to me.

First, the Kansas City car rental excise tax is borne by consumers in the form of higher total costs for renting a car. That is, the tax is passed forward from firms to individuals in the form of higher prices. This is an expected result in a highly competitive industry with historically thin margins. Because the overwhelming majority of renters at neighborhood branches in Kansas City, Missouri, are local residents, it is local residents who are bearing almost all the burden of the car rental tax imposed at these branches.

A rental car tax doesn’t tax outsiders, the burden is almost entirely local. And taxing residents whose cars break down is difficult to justify. “These people are having such a bad day, so what does it matter if it gets a little worse?” is about as good as I can do.

Second, we find significant customer sensitivity to the car rental tax. The imposition of the car rental excise tax reduces the number of rental customers in taxed branches by 9 percent relative to untaxed branches. Perhaps the best evidence of customer sensitivity to the heavy tax is that people who lived in ZIP codes that are close to taxed branches changed their behavior dramatically, reducing demand for rentals by between 41 percent and 50 percent and the demand for rental car days by between 69 percent and 86 percent.

We also document that overall rental car behavior shifted from Missouri to Kansas. This implies that the imposition of a specific car rental excise tax actually reduced Missouri’s state sales tax receipts by driving customers across the state line in search of less costly car rentals. [Emphasis added]

If you are not familiar with Atlanta, it’s basically an agglomeration of many counties. There is rarely a trip when I don’t cross a county line—on my way to the airport I pass through four counties (Cobb, Fulton, Douglas, and Clayton). Gwinnett residents are going to figure out how to circumvent the tax quickly. This poses several problems.

First, it is difficult to raise tax revenue when citizens can avoid purchasing the good being taxed easily. It will be simple for residents to rent cars from the seven counties surrounding Gwinnett. According to Gale and Rueben, tax avoidance in Kansas City actually lowered tax receipts.

Second, this is inconvenient and costly for Gwinnett residents. Let’s say you want to rent a $100 car for a five days, which will result in $15 in taxes paid ($500 * 3%). Residents ought to be willing to spend up to $15 to avoid paying this tax, most of which will be borne by the inconvenience of driving across the county line. Citizens end up paying a tax implicitly, except the county isn’t getting any revenue from it.

Third, this will harm the rental car industry in Gwinnett. As people rent fewer cars, rental offices will shrink fleets, trim employees, and possibly move across the county line to accommodate the rising demand in other counties. I thought the goal of this project was to increase commerce?

This tax isn’t bad because it’s a tax increase—although, that is a legitimate reason not to like it—it is bad because it distorts behavior in a way that drastically alters the market. The county would have been better off increasing the general sales or property taxes. Of course, those taxes would have required direct voter approval.

Gale and Ruenben conclude.

In summary, car rental taxes appear to be inconsistent with basic principles of good taxation, and recent efforts to raise car rental taxes appear to be the product of politically expedient but empirically flawed notions of who bears the burden of the tax.

A rental car tax is a poor tax instrument to use for funding the stadium even before we take into account the silliness of introducing a rental car tax in Gwinnett, specifically. I wish that county commissioners hadn’t been in such a rush to make this deal. If they had held public proceedings in advance, they could have avoided such simple mistakes.

This leads me to wonder, why was this deal done covertly? The Braves had no reason to keep this a secret. In fact, they had every reason to flaunt it. Typically, teams like to play localities against one another in order to garner additional perks. The silence from the Braves indicates to me that the organization believed all along that this was the best deal it could get. I mean, all that was left is 50% of parking, 10 non-Braves events events (which will have to compete with Braves, who plan to lease the stadium out on off-days), and tiny portion of naming rights. Publicizing its parameters would only lead for Gwinnett to reduce its offer after taxpayers saw what was being given up.

Maybe Gwinnett should alter it’s iconic water towers to read “Secrets Live Here” and “Gwinnett’s Tax Burden Is Great”.

2 Responses “Gwinnett’s Game of Shadows”

  1. Marc Schneider says:

    At least these nitwits will have to eventually face the electorate. Hopefully, the voters wills show them the door.

  2. Donald A. Coffin says:

    Well, if you were going to make–you’d already decided to make–a truly crappy decision, wouldn’t you want to do it as quietly as possible, with as little attention as possible? GIVEN the decision they’d already made, the secrecy is optimal.