Vehicle Ownership Tax Returns to Center Stage: States Seek to Strengthen Own Revenues Amid Reduced Federal Transfers
State governments are facing increasing pressure to diversify their revenue sources amid a slowdown in federal transfers and the volatility of revenue-sharing funds. Since the pandemic, several states have relied on the Stabilization Fund for State Revenues (FEIEF) to cushion drops, but their ongoing dependence on transfers—which still account for over 80% of resources for states and municipalities—continues to leave local finances vulnerable, warn specialists from the Center for Economic and Budgetary Research (CIEP). In this context, the vehicle ownership tax (tenencia) is resurfacing as a tool to boost homegrown revenue and provide more budget flexibility.
Despite a growing number of vehicles and larger cars being sold nationwide, only 13 out of 32 states currently apply the tenencia: Baja California, Colima, Hidalgo, State of Mexico, Mexico City, Morelos, Puebla, Querétaro, Quintana Roo, Guanajuato, Guerrero, Tlaxcala, and Veracruz. According to the study “Redesigning the Vehicle Ownership Tax: Revenue Potential and Progressivity” (CIEP and Transparencia Mexicana), tax collection at year-end is projected to reach 20.375 billion pesos—9.8% less than in 2024.
The research suggests that if the tax were uniformly implemented across all 32 states with a compliance rate of 80%, revenues could rise to 121.249 billion pesos—an increase of 98.966 billion. The redesigned tax preserves progressivity by tying the rate to the vehicle’s value and incorporates two components: one environmental (a fee for every 100 cubic centimeters of engine displacement) and another for mobility and infrastructure (2% of the depreciated value of the vehicle). The proposal suggests a national tax administered and collected by the states to avoid disparities and fiscal competition among states.
If such a scheme were implemented, reliance on federal transfers would drop by an average of 2.4 percentage points, though with varying impacts: Morelos would see the greatest reduction (4.8 points), while in Oaxaca the effect would be marginal (0.9 points). Although this doesn’t eliminate the need for transfers, it does enhance local decision-making power. In Mexico, “Aportaciones” (Ramo 33) are earmarked for specific functions, while “Participaciones” (Ramo 28) are discretionary but subject to the economic cycle. Therefore, strengthening states’ own revenues reduces exposure to volatility and can improve multi-year planning.
Mexico City is a case in point for both political and fiscal dilemmas. It is one of the states least dependent on federal resources and with the highest collections from the tenencia, but it maintains a subsidy—recently extended to 2026—for vehicles valued at under 638,000 pesos (including VAT). The city government expects to take in 4.582 billion pesos and double its vehicle registry. These incentives aim to prevent people from registering their cars in other states and to increase formalization, though overly broad subsidies risk eroding the tax’s medium-term collection potential.
The macro environment also plays a key role. With the Mexican economy losing momentum after the post-pandemic rebound, and with federal public finances in a consolidation phase, the growth of state revenue shares might be more limited. Furthermore, collections from fuel excise taxes (IEPS) and fluctuations in oil prices often inject volatility into the funds available for redistribution. Meanwhile, nearshoring is pushing several northern and Bajío states to accelerate connectivity, water, and energy projects. To finance these, the tenencia can complement other local sources—such as the property tax, which in Mexico remains far below OECD collection standards—and payroll taxes.
Implementing a uniform tenencia faces challenges in terms of management and fairness. A robust vehicle registry, coordination with the national public vehicle registry (REPUVE), and mechanisms to discourage out-of-state registrations are all essential. Including hybrids and electric cars in the taxable base, with environmental and infrastructure-use criteria, aims to internalize costs linked to space occupation and battery life cycles, without unduly discouraging technological transitions. It will also be important to avoid regressive impacts by using differentiated rates based on vehicle value and relief measures for lower-income households or small businesses.
Another aspect is the formalization of the irregular vehicle fleet along the northern border. Programs for the regularization of foreign vehicles expand the potential tax base but require administrative capacity to keep these owners in the formal system. Clearly earmarking the use of these tax proceeds—for road upkeep, traffic safety, public transportation, and environmental inspections—could boost social acceptance of the levy while improving the quality of local services.
In sum, the vehicle ownership tax is once again emerging as a viable lever to strengthen subnational revenues in Mexico. Its revenue potential is significant, but its success will hinge on a progressive, uniform, and transparent design; improvements in vehicle registration; and effective coordination among the states. In the coming years, the balance between financial autonomy, competitiveness, and social legitimacy of local taxes will be key to the sustainability of state finances.
