Zipcars: The Car Sharing Market Gets Zapped

A growing sector of the urban populace is turning to “car sharing” — sharing vehicles through membership in nonprofit or for-profit organizations — for cost and convenience. Since 2006, membership in car sharing organizations has grown from about 100,000 to more than 500,000 people.

Although the car sharing market is still tiny compared to the demand for privately owned vehicles, there is much to like about it, particularly when it is available in residential neighborhoods. Research by Susan Shaheen, professor at the University of California-Berkeley, shows that people who turn to car sharing drive less, use more fuel-efficient vehicles, and increase their use of “non motorized” transportation (walking and biking). Data is mixed about whether car sharing adds or subtracts from use of public transportation, but the overall impact appears to be negligible.

The way car sharing works is simple: Members join an organization to gain access to a fleet of vehicles for use on a pay-as-you-go basis. The vehicle is picked-up and dropped-off at unattended location called a “pod”; the sites are generally located throughout a service area, rather than at a centralized location.

Members typically pay annual or monthly fees on top of variable fees based on the number of hours, and sometimes the mileage, of each trip. The reservation and check in process is fully automated, as bookings are made online or via a smartphone, and vehicles are accessed using a smartcard.

Car sharing often fills a missing link in a package of transportation options that can substitute for private vehicle ownership. Members often use transit service (or walk or bike) for daily commutes, use taxis for one-way trips or those that are short in distance but long in duration; rental cars, airlines or trains for long-distance trips; and car share vehicles for trips that might, for example, involve shopping, transporting heavy items, or visiting a suburb or nearby city.

Zipcar, the nation’s largest car sharing provider, now offers its services in 11 major metropolitan areas and on over 150 college campuses. The Boston-based company issued its first publically traded stock in April 2011. Among nonprofits, City CarShare in the San Francisco Bay Area, I-GO in metropolitan Chicago, and PhillyCarShare in the Philadelphia area are the largest.

Traditional car-rental companies are also getting in on the act. Enterprise Rent-A-Car operates WeCar, while Hertz Corporation has created Hertz on Demand, which has a foothold on 44 college campuses in 26 states and commands a significant presence in metropolitan New York. U-Haul’s U Car Share, primarily serves Salt Lake City, Utah, and ten college/corporate campuses in nine states.

Of course, car sharing will likely account for only a small share of the travel market for the foreseeable future. The opportunity costs of time spent finding an available car, booking a reservation, and traveling to a pod can potentially be high, and prospective members accustomed to vehicle ownership may be hesitant to try a new transportation lifestyle. Car sharing is still rare in low-density areas. In addition, it’s been slow to show it can be profitable, although the sector’s rapid expansion may mask the profitability of mature markets.

Also standing in the way are high taxes imposed by municipal governments. Many such taxes were created with the idea of extracting revenue from airport travelers visiting from out-of-town for business or tourism. As our research shows, however, these taxes increasingly fall on neighborhood folks who simply want to make do without owning a car.

Scott Griffith, CEO of Zipcar, the nation’s largest car sharing provider, points to the “tax-related headwinds” slowing the growth of this sector.

In many cities, consumers pay taxes of more than 40 percent for a one-hour trip to the grocery store. Three cities — Boston, Chicago, and Portland, Oregon — have re-defined car sharing to provide waivers from certain taxes. But most cities still levy the full spectrum of fees that apply to car rentals. Our study shows that these taxes average almost 18 percent on one-hour reservations, and about 16 percent on the average reservation, rates that are more than twice the prevailing sales tax, which averages only about 8 percent.

The situation is at its worst where consumers must pay flat amounts per transaction, regardless of the duration of the trip. Car sharers in New Jersey pay a $5 per-transaction fee, plus sales taxes, each time they use a vehicle. When coupled with other fees, this generally results in a tax rate of around 60 per cent on one-hour car sharing reservations. Passionate appeals have laid the groundwork for a bill presently under consideration to exempt car sharing organizations from this tax, but the prospects for passage remain uncertain.

Maricopa County (Phoenix), Arizona imposes surcharges of $2.50 or more, while Colorado, Connecticut, Florida, New Mexico, Pennsylvania, and Allegheny County (Pittsburgh), Pennsylvania, each levy $2 surcharges. Cities without such fees tax car sharing heavily, as well. Car share users in New York City and in Seattle pay a combined tax of more than 19 percent, a levy that’s akin to the “sin taxes” on alcoholic beverages.

Most of these fees were created before car sharing became a popular alternative. When establishing fees, it seems unlikely that legislative bodies contemplated that large numbers of local residents would have “virtual” access to cars in their neighborhood and seek to use them for less than a day.

So, if the high taxes are the product of misguided government policy that can and should be corrected, why isn’t it fixed? Predictably, efforts to lower the burden have been complicated by the severe budgetary shortfalls facing governments. Some policymakers are nervous that technological innovations will blur the distinction between car sharing and the traditional rental car business, creating a slippery slope. As the car-rental business shifts away from airports, it faces similar problems.

Investment in car rental models which give customers access to cars in a few keystrokes, and which offer hourly rentals at neighborhood pick-up locations, suggest that more changes in how people use cars are on the horizon.

Municipal government espousing to be green need to take a hard look at their fees. Market-based innovations such as car sharing can’t reach their potential with today’s punitive tax structure. Reducing taxes for neighborhood car sharing organizations to levels comparable to the general sales tax is a necessary step to ending the penalty for life without a private car.

Joseph P. Schwieterman is director and Alice Bieszczat a research associate at the Chaddick Institute for Metropolitan Development at DePaul University in Chicago. They are the co-authors of a new study, Are Taxes on Car Sharing Too High: A Review of a Tax Burden Facing an Expanding Transportation Mode?.

Photo by Romana Klee, #113 zipcar