Motor Vehicle Tax Evasion
by
Tom Hewlett and italicized underlined text inserted by Bill Huff
November ’98 House Program Review and Investigation Committee
(See Legislative Research Report #282)

The Program Review and Investigation Committee of the Kentucky General Assembly was told at its November [1998] meeting Kentucky state and local governments may be losing as much as $30 million annually through the abuse or circumvention of the state's motor vehicle registration system.

If Kentucky were an "average" state, the loss would be $17 million. 'While all states experience some motor vehicle registration avoidance," said state analyst Tom Hewlett, "we believe Kentucky's problem with motor vehicle registration abuse may greater than average." Hewlett said.

The loss figure is an estimate calculated using statistics from a national study conducted by the Council of State Governments and data provided by Kentucky State Police Operation Border Crossing.

State Police took over motor vehicle mis-registration compliance work in November ’97, after the Kentucky Revenue abandoned their “citing” efforts in ’92, even though continuing to send and collect tax bills till mid ’93 from the estimated $8.2 million unbilled ‘violators” backlog. However, citing budget constraints in mid’93, the Revenue Cabinet abandoned omitted and delinquent tax billings from the estimated $8.2 million dollars of uncollected usage & property tax backlog. The Kentucky State Police compliance work took over citing illegally licensed motor vehicles.

Hopefully, these violators were forwarded to theRevenue Cabinet for billing since they were circumventing Kentucky’s usage and property taxes. The State Police involvement became a reality because the Transportation Cabinet’s Division of Vehicle Enforcement Officers, whose statutory duty it is to cite such motor vehicle violators, would not perform their statutory compliance duties due to a conflict with their priority assigned truck safety and a court case involving an enforcement officer making a DUI arest in late ‘80s that ended up in court from the late ‘80s till June ’94. The court ruled Vehicle Officers are to enforce all laws pertaining to motor vehicles.

Based on the CSG study, Hewlett said Kentucky could be expected to have a higher than average level of tax evasion due to the presence of border states that do not levy property tax on motor vehicles or do not require proof of insurance at the time of motor vehicle registration. He said the $30 million annual loss would be the result of these differences. Based on Hewlett's calculations, the loss of usage tax revenue could be as much as $15 million annually.

In 1997, Kentucky taxed more than three million vehicles, collecting $244.6 million in property taxes and $317 million in usage taxes, according to Hewlett. Usage tax revenue is deposited in State Road Fund, and approximately 65% of the omitted property tax collected goes to county and local governments to fund schools and other functions of local government, The remaining 35% of motor vehicles property taxes is deposited into the state's General Fund.

Hewlett said motorists avoid paying motor vehicle property and usage tax by licensing their cars in other States that have no property tax on motor vehicles; abuse the use of Kentucky's temporary tags; or fail to renew the registration on their vehicles. As a result, he said, Kentucky is losing income that should go for the repair of the state's roadways and fund local schools and other services. Kentucky's problem, he said, is exacerbated by Tennessee and Ohio not having vehicle property taxes.

Bill Huff, who appeared as a former Revenue Cabinet employee involved with past Revenue Cabinet attempts to collect from these outlaws added, lack of budget due to lack of priority placed on tax evasion by the administration, legislators and judicial branches of government.
Citizens of Kentucky living in counties near Tennessee or Ohio are tempted to cross the border to register their vehicles.

In addition, he noted, Tennessee does not require proof of insurance at the time of vehicle registration serving as "a double incentive" for people living along the Kentucky/Tennessee Border to register their vehicles in Tennessee.

Hewlett 'said Revenue officials have said existing laws are adequate to prohibit tax evasion by Kentucky residents, but "enforcement of the existing laws was inconsistent. He said local police and county sheriffs often do not assign a high priority to motor vehicle registration abuse. At the same time, local law enforcement generally has better visibility over their respective communities than any state law enforcement agency.

The 1998 PRI Committee staff recommended: (See LRC Research Report #282)
· Continued collaboration between the Revenue Cabinet and the Kentucky State Police to find and properly bill individuals with improperly registered motor vehicles.

The General Assembly consider providing an incentive to local law enforcement officials, as well as state police, Vehicle Enforcement Officers, Revenue Cabinet property tax personnel involvedwith omitted property tax compliance by mandating any fines or penalties assessed against motor vehicle registration abusers be shared with the organization responsible for identifying the registration abuse.

Hewlett said, providing the opportunity for sheriffs and local police departments to supplement their budgets by proceeds from detecting motor vehicle registration abuse should be an adequate incentive to get them involved in the effort.

Bill Huff, a retired Revenue Cabinet official who headed the [Revenue Cabinet’s Freddie Freeroader program before his retirement in 1994 told there are as many as 65,000 passenger cars using illegal registration amounting to an estimated $35 million lost in usage tax and $6.5 million in property tax evasion. He based his estimate on an extrapolation of evasion statistics compiled by [he and his freeroader staff] the Revenue Cabinet from 1987 through 1992.

In 2006 adding estimated 26,000 migrant drivers to normal motor vehicle tax evasion, its estimated over 150,000 now operate daily on Kentucky’s highwasy…FREE….COSTING STATE & LOCAL GOVERNMENTS ESTIMATED $82,500,000 DOLLARS!

In addition to passenger motor vehicle usage tax evasion operating on KY’s highways….FREE….Huff said there was significant usage tax evasion among Kentucky’s U-Drive-It permit holders---especially those operating fleet lease/rental car fleets from the Greater Cincinnati airport---should be carefully reviewed. Under current KRS 138 KY statutes pertain to Transportation Cabinet’s, Divison of Motor Carrier rather than Division of Vehcile Enforcement Officers, compliance chapter 138 usage taxes..

Huff urged the “total involvement” of the Finance Cabinet's Vehicle Enforcement Officers to work with Finance Cabinet's Department of Revenue property tax compliance program. He noted a 1994 court decision had ruled vehicle enforcement officers are responsible for enforcing all statutes pertaining to motor vehicles [citing Kentucky motorists operating their motor vehicles upon Kentucky’s highways using illegal license plates] and “since DMV is a Road Fund agency, it would seem only logical they would be involved.”

Huff also said, “The judiciary should be educated to help eliminate tax evasion. …A “judicial attitude” about this type of law enforcement has helped perpetuate tax evasion. Huff supported the PRI Committee staff incentive recommendations.

Representative Charles Siler, Williamsburg, whose district borders Tennessee, said Tennessee tags were prevalent on vehicles in his district. He said “this means the vehicles are usually not insured, and there appears to be no enforcement” with regard to the Tennessee plates.”
State Police Commissioner Gary Rose said he agrees there is significant tax evasion. He noted the State Police had written 9,655 citations for improper vehicle registration since the border crossing program was started.