New $3 tax on rental cars could fund economic development
The Sioux Falls Development Foundation wants Sioux Falls voters to decide whether to enact a $3 per day tax on most vehicles rented in the city to help fund economic development.
The City Council is scheduled to hear a first reading of the ordinance Jan. 19. If given the council's blessing, a public vote on April 12 would be required before collection of the proposed tax starts in July.
The idea came after a year of analysis by six former Development Foundation board chairs.
“The charge to the chair people was to decide a vision and position for the foundation looking ahead 30 years,” current chairman Dale Froehlich said. “We looked at some of our structure, our expenditures, but we also looked at potential revenue sources.”
He said the group reviewed about one dozen potential new revenue sources before settling on the rental car approach.
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“Because it’s so common throughout the industry,” he said. “We looked at 25 other towns and of those towns, 21 of them have such a fee.”
A $3 daily tax will generate about $1 million annually, he said.
Other communities use revenue generated through rental cars to fund economic development, said Slater Barr, the foundation’s president. Cities also use it to pay for facilities, stadiums and other entertainment venues.
“The reality is that economic development has been very good for Sioux Falls. It’s catapulted us into the eighth strongest economy in the U.S.,” he said. “All of these new restaurants and entertainment venues and recreational opportunities, all the quality of life things, stem from having a strong economy.”
Economic development in a metro area that recently reached 250,000 brings new challenges, he added. Larger projects that bring more and better-paying jobs require competing with bigger cities in places with income taxes and other revenue sources that they use to incentivize businesses.
“They have an awful lot more resources to assist the company, to put in infrastructure, to do all the things that need to be done to land that company. And we just don’t,” he said. “So this is a tool that could help us greatly and it’s a relatively painless tool.”
The foundation would work with the city to determine the use for economic development, Froehlich said. The most immediate need is moving forward with developing its newest development park, Foundation Park, he said.
The 800-acre property in northwest Sioux Falls is attracting serious interest from new businesses. Two have signed letters of intent and two more are close to committing, Froehlich said. Those four projects would generate more than $167 million in construction, more than 300 jobs and take nearly one-quarter of the land available.
They also would require significant infrastructure to be built.
“Some of them need rail and some new wastewater facilities and they all need roads and utilities,” Froehlich said.
Barr estimates the cost of getting the park ready for those businesses will be about $40 million.
The proposed rental car ordinance would exempt commercial vehicles, vehicles rented between private parties and vehicles rented for longer than 90 days. Sioux Falls residents who rent cars locally might also be exempted from the proposed tax if a pair of council members have their way.
Councilor Dean Karsky said insurance companies often pay for rental cars for customers involved in car accidents while repairs are made. Protecting Sioux Falls residents from the proposed tax would help minimize any increase in insurance premiums that could result.
"80 percent of the rental cars are rented by non-residents of Sioux Falls, so if we could exempt residents from the tax, I think it would be the right thing to do," he said.
In agreement with Karsky, Council Chairman Kenny Anderson Jr. said he's undecided if he'll support the new tax as it's proposed. He said a looming sales tax increase pitched by Gov. Dennis Daugaard this week gives him pause when considering adding another tax burden onto Sioux Falls citizens.
"I’m nervous about all the increases that we are putting on the backs of citizens who haven’t gotten raises," Anderson said. "Is this one that we want to see?"
Development Foundation officials met with representatives of Avis, Enterprise and Hertz to discuss the changes.
“Of course rental car companies object on behalf of their customers,” Froehlich said. “What we found is the ones located in South Dakota like Hertz and Avis are more interested in being good citizens locally. The largest share of the car rentals are controlled by Enterprise, and they have a corporate policy to automatically fight these kinds of fees even though they know it’s so common throughout the nation.”
A local representative for Hertz said corporate policy didn’t allow him to respond.
A representative for Enterprise sent a statement calling car rental excise taxes “different from other taxes because they are regressive, discriminatory, economically harmful and violate the Constitution.”
The company is part of a coalition called Curb Auto Rental Taxes that “has come together in an effort to end car rental excise taxes across the country” and support congressional action “that would put a stop to increasing car rental taxes.”
The group includes Avis, Hertz and other policy organizations, labor and consumer advocate groups as well as some auto makers.
“I guess for us, we certainly see the huge benefit of having this new industrial park and realize the millions it takes to acquire the land and acquire the infrastructure, but we were not fully supportive of it,” said Dan Letellier, executive director of the Sioux Falls Regional Airport.
Letellier’s concerns tie back to the rental car fee as a funding source for non-travel related uses. He envisions it as a funding source for potential airport development, potentially using it to construct more parking.
“It would generate a fair amount of revenue for us,” he said, adding that he doesn’t foresee the airport actively campaigning against the idea, “But if anybody asks what we think about it, I guess we would not be supportive of it.”
At $3 per day, the Sioux Falls fee would be the same as what Rapid City charges. Des Moines charges $3.75 and Omaha charges $4.50.
“This fee we pay … is helping them develop their communities,” said Scott Lawrence, past chairman of the Development Foundation. “It’s time we got ours. It’s ours to choose or lose. This is not so much about what we need to do today, but it’s really about tomorrow. To speed up the opportunity to get Foundation Park developed, get new businesses in there and create new opportunities.”
The fee Sioux Falls is proposing is low enough compared to other cities that if the airport needed to increase it, there’s room, Barr said.
“I think we can raise some and if they need to come back in the future and raise a little bit more there’s enough slack in there for them to be able to do that as well. The reality is we have zero and everybody else has significant fees on the books.”
Teri Schmidt, executive director with the Sioux Falls Convention and Visitors Bureau, said an added rental car tax would have little impact on the travel and tourist industries, especially for corporate travelers. A $3 daily fee could eat into what leisure travelers have to spend elsewhere in the community but not significantly, she said.
"It's another sign of growth of our community and it's certainly not any kind of outlandish fee or tax," Schmidt said. "It’s a common thing in our world today."
While it's estimated about 20 percent of car rentals are by Sioux Falls residents, there is no source to definitively show how many vehicles are rented in Sioux Falls by residents. The Development Foundation representatives talked with several industry leaders before producing what Barr called a conservative estimate.
The system isn’t set up to track where vehicle renters live but Barr said the group is open to looking at it.
“I’m just not sure it’s necessary, because the amount of local rentals is so very small and it’s a very occasional thing,” he said. “I’m not sure it’s worth the extra amount of management that would be required to track that but we’re certainly open to looking and investigating changes that could make the ordinance better.”
