Don’t get too excited just yet. Yes, the Senate did vote to give a tax break to new car buyers by a vote of 71-26. But the break is part of a stimulus package that has yet to be finalized. In other words, it’s still just part of the talk.
But it was popular talk. Sen. Barbara Mikulski (D-MD) managed to win approval for an idea she had originally proposed in the fall to allow new car buyers to claim an income tax deduction for sales taxes paid on the purchase of new cars as well as interest payments on car loans. The new tax break is supposedly a win-win for consumers and the automobile industry.
Only I don’t think it’s so great. I actually find myself on the side of Sen. Charles Grassley (R-IA) who fought against the inclusion of car loan interest as a tax break, saying that it would only increase consumer debt during the recession. Perhaps Grassley remembers that it was another Republican – Ronald Reagan – who ushered through the elimination of the personal interest deduction in the Tax Reform Act of 1986. At that time, Congress thought that such a deduction discouraged savings and encouraged people to spend beyond their means, which was not a desirable outcome.
Hmm.
If the $11 billion tax break becomes law, it would apply to the first $49,500 in the price of a new car purchased between November 12, 2008 and December 31, 2009. The break would be restricted to those individuals earning less than $125,000 and couples earning less than $250,000. The break would apply even for those folks who don’t itemize, which is not the case for mortgage interest deductions.
Don’t get me wrong. As someone who would love to buy a new car this year, I would welcome a tax break for doing so. But I think we may be creating an incentive monster. Consider this: the best selling car in America last year was, according to CNN, the Toyota Camry. So let’s say you go out and buy a Camry that maybe – just maybe – you didn’t really need but you were enticed by the tax break. One, your purchase of a Camry doesn’t help the US auto industry, which was the intention of the bill in the first place. Two, a Camry (one of the less expensive cars these days) will set you back about $25,000. Bankrate.com is putting new car interest rates at 7% – keep in mind that is for those with excellent credit. That works out to $1,750 in interest for the year. Using a blended average tax rate of 20% (more or less in the middle), your deduction is $350. Woo hoo! Only, you are now indebted for $600/month, assuming a four year loan.
The key in that scenario is whether you needed a new car. If you did, then maybe you’re ahead by $350. If you didn’t, and you were just enticed to buy new, you’re not ahead at all. You owe the bank almost $30,000 for an asset that’s no longer worth what you paid for it.
In the midst of an economy which crashed partially because it was fueled with debt – and in an economy where some families can barely pay basic living expenses like food and health care – is this the best answer? I say no. Creating artificial incentives to encourage spending on industry-specific items isn’t how we’re going to rebound from this mess.
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