By on February 3, 2009

The Detroit Free Press reports that Senator Barbara Mikulski (D-MD) has added some car dealer-friendly provisions to the proposed $43g (gazillion) economic stimulus package.

Mikulski’s proposal would grant a tax credit for vehicles bought between Nov. 12 of last year and Dec. 31 of this year. The tax break would only go to families making less than $250,000 a year, and would only apply to interest on loans up to $49,500.

“Everyone wants to save auto manufacturers, but no matter how much government aid we give to the Big Three auto makers, they can’t survive if consumers don’t start buying cars,” Mikulski said.

True dat. HOWEVER, this is like putting a band aid on an arterial wound. Until the U.S. housing market recovers, car sales will not come back. And maybe not even then, for a while anyway. How Congress/the feds do that remains to be seen. Later.

Get the latest TTAC e-Newsletter!

18 Comments on “New Stimulus Package: Tax Deductions for Car Loans and Sales Tax...”


  • avatar
    redrum

    I think the headline is incorrect…sales tax is already deductible from federal income tax as of three years ago. You can even take a standardized sales tax deduction based on your income and still itemize large purchases like cars.

    P.S. Okay, I’m reminded that sales tax is only deductible if you itemize your taxes, so if this senator’s proposing it be deductible even for people taking the standard deduction, that makes more sense.

  • avatar
    50merc

    The devil is in the details, and details are sketchy. Although the newspaper called the tax break a “credit” it appears to be deductions for car loan interest, sales tax on purchase of a car, and a few other items. and taxes on cars.

    No matter, though, if information is scarce. I would be surprised if any senator other than Mikulski bothered to read the amendment. Hell, the bill is something like 700 pages. It’s like voting for a Russian novel because “War and Peace” is a catchy title.

    About half the 1040′s are standard deduction, so new itemized deductions won’t do those folks much if any good. The people who can most afford to buy a car aren’t eligible for the break — their money isn’t stimulative enough to offset the sinfulness of being rich.

    I can recall when Congress denied deductibility for a bunch of relatively petty items, in exchange for lower marginal rates, in the interests of tax reform (i.e., simplicity). But Congress doesn’t. Those who do not study the past are condemned to repeat it.

  • avatar
    zerofoo

    We already have a way to deduct car loans – they are called home equity loans.

    I borrowed against my house for my last car loan, specifically so I could deduct the interest on the loan.

    We need to encourage people to live within their means – that means buying a house you can afford – not a McMansion on an interest only or ARM loan.

    Once people get in houses they can afford they can then borrow against the equity they’ve accrued.

    Until you get to that point, buy old used cars with cash.

    Of course, none of this matters if you aren’t employed.

    -ted

  • avatar
    IOtheworldaliving

    Great idea. It’s not like we have too few people who are underwater on their mortgages already. Let’s lure some more of these people into negative equity situations with tax deductions on new car loans.

    Renting your residence and buying a good used car with as much cash as possible? Can’t have that kind of nonsense going on these days.

  • avatar
    DearS

    Money does not make people do things. My and anothers will is not necessarily for sale. I sometimes feel like screaming when people come at me like that. Giving people money does not drive the economy, only help make it possible to some degree.

  • avatar
    IOtheworldaliving

    zerofoo — aw, you beat me to it, essentially.

  • avatar

    ZEROFOO

    Are you kidding?

    Home Equity loans are part of the reason Americans are in the mess they are.

    Yes it makes sense to knockout the interest of a car loan by using a Home Eq Loan, but the problem is, Home equity loans had high interest rates.

    first of all, you need to actually own a home to get a HELOC and on top of that, you need to be in a Bank that’s willing to grant you a HELOC – not many of those nowaday.

    Secondly, the banks reserve the right to call in your HELOC at anytime – say, in the face of economic crisis? – and you can be left with a paid of car, that you own, but no equity except the fast depreciating asset which is the car itself.

    I made a fortune as a Mortgage Broker leading up to the subprime crisis in 2006, working for now dissolved “1st Capital Home Mortgage” (to make it sound like Capital 1 they named it that). I still give financial advice.

    Trust me, though it makes sense to buy a car on a HELOC, its a BAD BAD IDEA.

    I could tell you a million stories about people who bought luxury cars like that.

    AND ARE BANKRUPT NOW.

  • avatar
    no_slushbox

    As long as it applies to used cars with foreign badges, sweet.

    But this will do nothing.

    Assume a tax bracket of 25%.

    10% sales tax on a $20K car is $2000. Deducting $2000 will save a whopping $500 on taxes.

    Assume a interst rate of 8%. Deducting that will make it effectively 6%. On the same $20K car that is roughly $400 the first year, and declines each additional year as the loan is paid off.

    I’ve just assume a high sales tax and a high interest rate and the first year savings on a $20K car is just $900. And that $900 wont be realized until April 2010.

    I’m planning on getting some new used cars anyway, so I’ll take it if used cars qualify. But this will just hurt the tax base (1 trillion deficit this year) without stimulating sales at all.

    redrum:

    True, in no income tax states that wont even be a change. Although in income tax states the income tax deduction has to be foregone to get the sales tax deduction.

  • avatar
    CarPerson

    Home equity as security for an auto loan?

    In some cities, the non-owner occupied (rental) occupancy rate is as high as 70%. Nothing there to mortgage.

    Front page story that pretty much everyone buying a house after 3rd quarter 2006 is underwater unless you put 30% or more down. Not much there to mortgage.

    For those who have owned a house for 8 years or longer and not re-financed or taken out a second loan on it, the road is still pretty much blocked: banks talk a good story but try to get a loan and see the hoops they put you through just so you drop out so they don’t have to say No and create a stink.

    Second, who, other than the top brass at General Motors and Chrysler who run the company as nothing more than a cash cow for executive salaries, is securely locked in their job for the next 36 or 48 months?

  • avatar
    TEW

    I do think this will work in that it will make more people buy cars. If you ask any “self employed” worker they will tell you that you can write just about anything off as long as it used for your business. If you use a BMW to go only to work then the BMW is taxes write off. I do think that these kinds of bills are needed to help make the tax code fairer for all Americans.

  • avatar
    Mike the loser

    What is this country coming to?

  • avatar

    What’s home equity?

    What’s missing most of all is confidence in the economic future. Until that returns, people with good enough sense to still have a high credit rating will not be spending.

  • avatar
    redrum

    no_slushbox: Oh, okay, that makes sense. I live in WA state (no income tax) so I didn’t realize in other states you can’t take a sales tax deduction in addition to an state income tax deduction.

  • avatar
    Landcrusher

    How about we stop incentivising foolishness?

    Fiddling with the housing market and mortgage market got us into this mess. Let’s stop fiddling.

    We should have popped the housing bubble years ago by at least threatening to end the home mortgage dedution. That would have been a better move than the ones we made.

    All of the problems can be traced to a lack of understanding that there is no free lunch. If you want a fancy home and car, you have to earn them.

    Here is a stimulus idea. End payroll and income taxes. If you stop making it a nightmare to be an employer, more people will hire others. All businesses track sales or they would go out of business from not knowing what they are doing. So, just tax sales. Give every mouth in the country enough money each month to pay the taxes on basic food and shelter, and be done with it. Or, go nutty leftwise and give them enough to PAY for basic food and shelter. It would be cheaper than we are doing now.

  • avatar
    GS650G

    It’s been a long time since car loan interest was tax deductible, at least 20 years. All that was swept away in return for lower rates in the 80′s. I never thought it was a good idea to allow someone to pay less federal taxes because they shelled out interest on a car loan. Even the home interest deduction is a bit off. Why should money paid to a bank for a house loan not be subject to income tax? I know it’s a sop to the middle class and meant to encourage home ownership. But it increases the burden for others.

    Reagan hated the deductions for state and local taxes primarily because it encouraged state and local government to raise them. People in low tax areas paid more federal tax as a result. The AMT has clamped down on some of this, imagine paying ridiculous local and state fees only to not be able to deduct any of it. Rude awakening.

    This proposal to limit it to 250K AGI is a ruse since anyone close to that level is in AMT range anyway.

  • avatar
    Boston

    Does anyone know if this applies to leases as well?

  • avatar
    Mark45

    Landcrusher wrote:

    Here is a stimulus idea. End payroll and income taxes. If you stop making it a nightmare to be an employer, more people will hire others. All businesses track sales or they would go out of business from not knowing what they are doing. So, just tax sales. Give every mouth in the country enough money each month to pay the taxes on basic food and shelter, and be done with it. Or, go nutty leftwise and give them enough to PAY for basic food and shelter. It would be cheaper than we are doing now.

    There is a plan for this, it just needs support. Check out http://www.fairtax.org

  • avatar
    hazard

    Bah, peanuts…you should be lucky it’s not the following…I think of all the supposedly democratic free-market oriented countries, Serbia went the farthest this week. I think it trumps all the clunker-trashing incentives seen thus far.

    The government will give you a ~1000€ subsidy if you have a non-EURO3 compliant vehicle (EURO3 is the current European emissions standard for new vehicles) and decide to replace it with a brand new shiny FIAT Punto 188 (that being the one before the Grande), allowing you to buy it for the low price of 5999€ (retail price minus the subsidy is about 7300€) – but wait, it gets better!

    If you can’t pony up the cash, the government will provide you with a 7-year (!) loan with the favourable interest rate of 4.5% (banks charge 11% for car loans, thereabouts) giving you a new car for about 100€/month (no small sum considering the average net salary is about 400€/month). As an added bonus, you car may fall apart and/or depreciate to a ridiculous sum before you pay it off (7 years!).

    Why the Punto? It’s made by Fiat Serbia, the factory formerly known as Zastava (used to make Yugos). If you’re thinking this is less costly than the bailout, the government already pledged a 300 million € investment into the company (which is 70% owned by FIAT of Italy).

    So, Americans, until Uncle Sam starts giving out cheques and loans for you to buy Toyotas assembled in the US, you can rest in knowing that your government has not gone completely batshit crazy.

    To add to the insanity described above, the government is thinking of offering this subsidy not only to its own citizens and residents, but to those of neighbouring countries!


Back to TopLeave a Reply

You must be logged in to post a comment.

Subscribe without commenting

Recent Comments

New Car Research

Get a Free Dealer Quote

Staff

  • Authors

  • Brendan McAleer, Canada
  • Marcelo De Vasconcellos, Brazil
  • Matthias Gasnier, Australia
  • J & J Sutherland, Canada
  • Tycho de Feyter, China
  • W. Christian 'Mental' Ward, Abu Dhabi
  • Mark Stevenson, Canada
  • Faisal Ali Khan, India