It’s Fix the Tax Code Friday! Yesterday, I blogged about NC’s efforts to woo Apple and Google to the Tarheel state by passing corporate tax breaks directed at each of them. This is nothing new. In my own state of Pennsylvania, a new film tax credit is being touted in an effort to bring more filmmakers to the area. Similar programs have also been created in parts of Canada, like Vancouver, to attract moviemakers up the coast and away from California.
And sometimes the credits are not so much about attracting a company as keeping it from going (see almost every professional sports team stadium in the US).
The idea behind these tax credits is that bringing industry will create jobs. Those jobs will result in the need for more local services. And voila, it’s a ripple effect. But that doesn’t always happen. And when it does happen, it’s not always at the level that the lawmakers had hoped.
But sometimes it does work.
So today’s “Fix the Tax Code Friday” question is:
Are tax breaks targeted towards keeping or attracting certain companies worth it? And if so, does it matter that the individual taxpayers may have to pick up the slack through increased tax rates or decreased services in the short term if the plan is for increased revenue to the state (or locality) in the long term?
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.
As blogged previously, Obama’s proposed stimulus package is meeting resistance – on both sides of the aisle.
Key members of the Senate Finance Committee have criticized plans for a $3,000 tax credit for new hires, citing that it wasn’t the most effective means of promoting employment. Sen. John Kerry (D-MA) said, “I’d rather spend the money on the infrastructure, on direct investment, on energy conversion and other kinds of things much more directly and much more rapidly and much more certainly create a real job.”
Also on the hit list? Proposed tax credits for working Americans, which had been pitched as a reduction in federal withholding. The credit would work out to $19.23 per week for married couples and a mere $9.62 per week for individuals. Some Senators (and readers on my blog) have suggested that would not do much for the economy, considering the cost.
Some members of the House are also calling for changes to the much dreaded AMT (alternative minimum tax), a continual thorn in Congress’ side. Of course, if history is any indication, if they start whining about the AMT now, they might – might – reach an accord by December…
Surprisingly, there has been little reaction to Obama’s plan (or lack of a plan) to not touch the federal estate tax. I’m guessing that proponents of eliminating the tax realize that it might not be politically advantageous to raise the idea of cutting the federal estate tax (with exemptions sitting at $7 million per family in 2009) during the current economic climate. But I’d expect to see the idea raised sometime during the year – the flukey one year “repeal” of the federal estate tax is set for 2010, with sunset provisions ready to drop the exemption to $2 million per family in 2011 with no action from Congress.
Of course, all of this is still just conversation until the ink is dry. What are your thoughts on what will stay and what will go? Got any better ideas?
You can pray for McCain’s gas tax holiday. You can walk more. You can carpool. Or you can consider not driving a car that takes $100 in gas to fill up…
After my post about going green, a reader – and fellow attorney – sent me a link to a memo that he prepared on hybrids. You can download it here as a pdf.
Thanks Brad!
