Senate Votes for Tax Credit For Auto Loan Interest

By Brendan Moore

02.04.2009

The US Senate voted yesterday to make the interest on auto loans tax-deductible. By a vote of 71 – 26, and by voice vote, the Senate approved temporarily allowing most buyers of passenger vehicles to deduct interest on auto loans AND the sales tax at time of purchase.

The estimate of cost to the overall taxpayer base is calculated to be $11 billion USD, and that will raise the cost of overall stimulus package that is being currently proposed to over $900 billion.

You may have noted the use of the words “temporary” and “most buyers” in the first paragraph when describing the amendment langauge. The tax breaks are only available to those who purchase(d) new passenger vehicles between November 12, 2008, and the end of 2009 that cost less than $49,500. And, families with a household income of $250,000 or more are not eligible for the tax credit the way the current amendment is written.

The retroactive eligibility will appeal to everyone except the people that bought their new car or truck on November 11.

The NADA (National Automobile Dealers Association) pushed hard for the provision and seemed to be very happy with the outcome in the Senate. The House did not include the provision in the stimulus bill they passed and sent to the Senate earlier, but it is believed that the provision stands a good chance of being approved by the House as well. The NADA forecasts that the measure will save the average consumer around $1500 on a $25,000 vehicle purchase.

Senator Barbara Mikulski, one of the ardent sponsors of the amendment, stated. “Everyone wants to save auto manufacturers but no matter how much government aid we give to the Big Three automakers, they can’t survive if consumers don’t start buying cars. We can help by getting the consumer into the showroom.” Mikulski also cited the same figures provided by the NADA regarding how much the average consumer would save on a vehicle purchase.

Many people in the auto manufacturing and auto retail sector were critical of the NADA push, saying the tax credit was not large enough or immediate enough to be meaningful in terms of increasing sales volume.

An NADA spokesman rebuffed that criticism, saying they got as much of a sales incentive as was reasonable in the current political climate.

COPYRIGHT Autosavant – All Rights Reserved

Author: Brendan Moore

Brendan Moore is a Principal Consultant with Cedar Point Consulting , a management consulting practice based in the Washington, DC area. He also manages Autosavant Consulting, a separate practice within Cedar Point Consulting. where he advises businesses connected to the auto industry. Cedar Point Consulting can be found at http://www.cedarpointconsulting.com.

Share This Post On

8 Comments

  1. Sounds like this will not apply to pre-owned vehicle purchases?

  2. I don’t think this is going to do much because a lot of people want instant savings and you don’t get the money back in this deal until you get your tax return in 2010. It’s not enough enough to make people who are worried about their jobs and the economy buy a new car.

  3. I’m liking this, since I am going to buy a new car anyway this year. I’m liking this a lot.

  4. Of course they’re happy, but independent dealers are not allowed to belong to the NADA. What does this do to them? They are the small business that run America not the fat cat new car dealers.

  5. I was unaware until just now that independent used-car dealers are the foundation of the United States economy. Well, I learned something today. We should give a 1500 dollar tax deduction to everyone that buys a clapped-out and previously wrecked 1989 Nissan Maxima with 83,000 miles on the rolled-back odometer from the local used car lot. Sale price? $5995.

    Because that would really jumpstart the economy.

  6. Seems like a good idea and I hope it works, but it may or may not be a help to US factories. It will help dealers, though.

  7. So we have an economy that is stalling (partially) because consumers took on too much debt. So the solution is to encourage them to borrow more?

    And what do those of us who are fiscally responsible and pay cash for new cars get?

  8. Actually, having had more time to think about it, this idea probably isn’t all that great. The tax deduction won’t be that great, once a person’s tax rate is factored in. If you pay $2,400 per year in loan interest, you’d save $600 per year; sales tax of 6% on a $25,000 loan is $1,500, meaning a savings of $375 at the time of purchase.

    Not sure that such small savings, in the context of massive discounts, will be sufficient to spur very many people to accelerate their vehicle purchases. At the same time, as a tax deduction, it’s likely to benefit the relatively well-of much more than people who need the relief. If the gov’t wanted to help the auto industry, it could accelerate its fleet purchases and provide money for state and local governments to do the same. It would have much more stimulative effect on a dollar-by-dollar basis.

    Finally, what Chris K just said. Encouraging people to take on more debt is not a good thing–that’s one of the problems right now. People can’t buy because they have too much debt. Note, however, that whether it is “fiscally responsible” to pay cash for a car depends on several factors and it is not an option for most people.

Submit a Comment

Your email address will not be published.