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 need 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.
Some people are saying that more and more people are saving instead of spending. While that’s good for the individual person, it’s not that good for the nation as a whole because much of our GDP depends on consumer spending. Perhaps that’s what they are trying to create, in addition to government spending? But true, then might be back again to people spending money they don’t have…
Not sure how I feel about this. I’m all for tax breaks. But not a big fan of very specific ones like this one.
I agree with you in many regards. However, if some idiot can’t figure out for themselves which is a better idea: saving up their money and buying a car they can afford for cash OR buying one they can’t afford with a loan, then that’s their problem and not mine. (As long as we’re not bailing them out when the repo man comes and takes their car.)
What spending is the government cutting to offset the decrease in revenue from this potential program? Why isn’t our country run more like a business?
@Colin: Our country is run like a business. A big business that makes bad decisions and then is bailed out at our expense…
Anyway, I was really excited about this credit — until I saw the operative: New. How crappy is that? If you want to stimulate small business, offer it for any car. I could go to my local used car dealer and give him a leg up by buying a modest used car and financing it at the dealership. I finance $6,000, get a little tax break, the dealer gets business (and a commission for the loan) and the bank gets a little more inflow from a creditworthy person who will pay on time.
So now you say this tax break won’t help U.S. auto makers. Well what about all the Americans working at the Camry plant in Georgetown, Ky. They’re Americans right? I thought this was also about helping everybody get back on their feet. My point is, I know that Toyota isn’t what you would call an “American car company” because it wasn’t “born” in the god ol’ USA. But what about all of the men and women from this country that has to put food on the table every day.
They’re making a good living and selling a good product. You can’t fault them for that. The American auto companies got themselves into this mess, so let them bail themselves out.
Thans for letting me put in my two cents worth.
Mike K – thanks for your comments! I am not disagreeing that the bill could help US employees. I’m just saying that the Senate offered up the bill as specifically directed towards boosting US automakers (the big 3) and I don’t think this bill does that. I think it’s shortsighted on a lot of levels – much as Miranda pointed out (and I had not considered) that it does nothing to help those selling or buying used cars!
Whoever came up with the Nov. 12th date? We bought a car we really didn’t need in order to upgrade and to help our economy since we had the cash instead of borrowing. When did we do that–Nov. 1st– so now we get no tax break for buying an American car. Personally, I think the UAW would rather bankrupt the country by demanding excessive wages and benefits. However, I just can’t go along with buying foreign cars. We need manufacturing in this country, but it’s about time the unions are reasonable and competitive. And don’t get me started on CEO’s salaries and perks! Why no one thinks actors, athletes, and congressmen who increase their own salaries in a recession and don’t pay social security shouldn’t take a cut in pay and benefits really baffle me. We never hear anyone protest how much they make but always blame businesses that make a profit.
I’ve read economic research in the past about the strong correlation between a tax deduction/tax credit and the changes in cost for a good or service. If it makes it into law, I wonder if we’ll see the automakers reduce incentives as a result of the tax incentive?
PD – great observation! That’s the gist of my housing credit piece (posting later today).
Jane – Why is the sky blue? Why is Nutella so darn yummy? Who knows about the date? It’s Congress. Seriously though, I think it roughly corresponds with the date that the Big 3 originally went begging. Mikulski intro’ed her version of the bill around that same time.
And for those of you who didn’t see it, Miranda posted about planning to buy a used car. She reminds us that folks like her are (for now) left out of the planned credit.
Vast majority of Camry’s are built in the U.S. by U.S. workers. The TaxGirl info. is incorrect.
Dennis – I didn’t say that buying a Camry wouldn’t benefit Americans. I realize that folks who build and sell “foreign” cars may be Americans: my grandmother lived not so far away from a BMW plant in SC that employed a lot of local people. What I’m referring to is the reason given for this particular bill by Congress was that it would benefit the US auto industry, specifically the Big 3 (Ford, GM and Chrysler) who went begging for money in November. I don’t think this bill gives them an edge…
Does this apply to interest paid on an auto lease?
I honestly can’t tell. I read the statute and the headers don’t completely mesh with the body. The headers clearly say “purchase” but the text says “acquired for use by the taxpayer and not for resale after November 12, 2008, and before January 1, 2010.” It’s very awkward wording. I’ll dig some more – would love input from anyone who knows better.
Joe, the final version says no:
What about sales tax on a lease?
are SUVs included in the tax breaks?
The final rule is here:
It’s applicable to new cars, SUVs, light trucks or motorcycles, that weigh no more than 8,500 gross pounds. Motor homes also qualify (go figure).
Kelly
You also need to let folks know that although they have been saying they will do this tax break on new auto purchases since last year, according to the IRS it is only good on new autos purchased AFTER 2/17/09 when the bill was signed into law. Didn’t help me who knew they were going to do it and bought my vehicle on 2/13/09. CJ
Thanks – I mentioned in my final stimulus article that it was only good through the end of the year once signed but another mention never hurts.
Tax girl,
Toyota’s made in the U.S. also. (Kentucky) Many suppliers for component parts also (Ohio, Tenn.) It helps everyone (a little)
Thanks, Pete!
I know that many foreign companies manufacture here in the US – they are a lot of our clients! And my husband used to do work for VW in Pennsylvania…
I was just commenting that the original legislation was framed as a direct response to the pleas from the Big 3 automakers for help – and the proposed legislation wouldn’t really have helped them that any more than any other manufacturer. If Congress wants to use tax as a means to an end, they should at least think about what they claim they’re trying to do.
Tax Girl! Awesome blog and info. I keep hearing about tax credit for ‘this’ and ‘that’ around the watercooler and can’t seem to find the lowdown – until your site. We too will have missed the boat on the $350 as we ‘downgraded’ to a small Toyota from a SUV in June ’08. BUT we did get our loan before the hullabaloo started with a great interest rate (although husband is no stellar applicant! god love him). Guess it all comes out in the wash. Now, armed with correct information I head off to ‘turbo’ charge our ’08 taxes! I’ll be back if I run into questions even Tim Geithner couldn’t answer! 😉
If people buy a Camray without doing their research, then they deserve what they get. The Chevy Malibu was car of the year, gets better gas mileage, looks better inside, has a better warranty and cost thousands less. Ford has a simalar car. In order to “stimulate” the economy, WORKING people need a tax break at the very least. Not a one time payment, but something that in constent.
The new car tax ‘is’ aimed at a specific product and it will not cure the nations problems. However, I don’t believe we are going to find a ‘fix all’ solution for the nations problems anyway, and what we will need is solutions such as this tax break, a little here a little there and pretty soon things will start to turn around. Yes, it will add to consumer debt, but money is not being dished out as easily as it once was and lenders are actually checking to see if buyers really ‘qualify’ for the money they want to borrow. in other words, they are making good loans versus bad. Good loans are made by responsible people that have the means and intentions to repay in good faith.
After 9-11 when President Bush called on Americans to buy products to keep the economy going, I did just that. I think that call out is even more relevant today. If a consumer is thinking of buying a new car or replacing and old car and still has the means to take on some debt, now is the time. Most dealerships are offering great incentives and prices. In the long run it could even save your own job.
And if anyone is interested, yes, I did just buy a new Mercury Milan, and traded off a foreign make.
I enjoyed your post..good information. Only 1 thing I think should be clarified. It is true that Toyota isn’t considered a US automaker. However they do have 8 factories in the US that build vechicles here in the US employing ~35k people. In addition they buy a lot of parts that are manufactured here in the US. They built plants here in the US and have not
moved out of the US to build cars as have our “US automakers”. We are paying for the Mexicans and Canadians to continue building vechicles in their countries. How much money did Mexico or Canada offer the US automakers to continue building vechicles in their country? Yes, I am probably prejudiced since I am employed by Toyota. I just think people should realize that some of the foreign automakers do help our economy by employing people as well as spending money on parts that are built here in the US. For your information, the Tundra plant in San Antonio Texas employs 2000 people. In addition, another 2500 people are employed by the 22 on-site suppliers who build truck parts right here in Texas.
Thanks, I agree that auto manufacturers like Toyota do employ US workers and benefit our economy (my husband used to do some kind of wiring work for VW in his pre-law days). I just thought it was silly for Congress to say that the pretext of the bill was to benefit the Big 3 (the US automakers that came begging to DC) when the way it was worded wouldn’t have done that. As it turns out, the final law (hopefully) will help all auto manufacturers!
dont really need a tax break with these tips……..
You simply have to be able say ‘no, thanks at that price’ at least once to the dealer. This gives them a strong message that you are serious about your research.
You should also bring a piece of paper to the dealership and make sure you do all the math of the finance calculations yourself. The point is not that they will do the math wrong. The point is you will see exactly how the deal is structured. Do not be afraid to take the time to do this or look like a fool for mapping out your car deal in the dealership.
My dad swears by this process, http://tinyurl.com/knflt6