Harry Moroz
Don’t Attach the Wrong Strings to the Auto Bailout
Tucked into one of two possible Senate “vehicles” for the auto industry bailout is a seemingly benign, even sweet, deal: tax relief for new car purchases. Senator Barbara Mikulski, Democrat of Maryland, introduced the legislation on Monday and Senator Reid included it in a larger stimulus package offered on the same day. The provision would allow households making less than $250,000 a year to deduct the interest on auto loans (of up to $49,500) along with state sales taxes on car purchases from their federal income tax. The tax break applies only to new car purchases.
Why add the tax break to a $100.3 billion stimulus package? Senator Mikulski argues that the deduction is “good stimulus policy” that would save jobs (mostly at car dealerships), help consumers (who would save about $1,500 on a $25,000 minivan), and boost state sales tax revenues (which are falling). The Chairwoman of the National Automobile Dealers Association echoed the Senator’s arguments at a hearing of the Financial Services Committee this morning.
Certainly, there are very sound arguments for rescuing the Big 3 automakers, the best of which are pragmatic and address the possible consequences of failure (the same goes, by the way, for the rescue’s opponents). But one wonders if “tax relief for new car purchases” doesn’t undermine the very logic of a bailout based on pragmatism: we will push to the side our frustration with a recalcitrant Detroit and swallow our ideological opposition to “car culture” only to preserve good, union, middle-class jobs; to prevent wider economic calamity; and (perhaps) to give the Big 3 a “last” opportunity to exhibit the business changes they insist they have made.
Would-be car purchasers are already in a buyers market. As sales have tanked – car sales were down 24% and SUV sales 53.8% year-over-year in October – attractive deals have proliferated. Indeed, in her testimony today, Annette Sykora of the Dealers Association called the current moment “a great time to buy a car…”
But people aren’t buying and most of them probably shouldn’t be.
Certainly, they should not be buying a car if $1,500 (at the end of the year) is all that is separating them from a new Dodge Minivan. Not only does the tax break encourage early replacement of perfectly good cars (the break expires at the end of 2009), but it encourages already debt-ridden Americans to assume more debt. And it is not even clear that stoking demand for cars will be sufficient, even if higher interest rate loans appear more affordable to purchasers. Secretary Paulson has emphasized, along with the WSJ, that loan availability depends on the securitization market, which has “for all practical purposes ground to a halt.”
Economic stimulus and especially pragmatic sacrifices for general economic health require more, not less, scrutiny of our priorities. The auto bailout will likely help avoid a very painful collapse in an already weak economy. A tax cut for new cars would encourage Americans to rack up more debt and buy the same gas guzzling cars without assisting the failing economy in a significant way.
Strings attached to the auto bailout should encourage real change in Detroit.
Harry Moroz: Author Bio | Other Posts
Posted at 4:01 PM, Nov 19, 2008 in Auto Bailout | Congress | Economy | Energy & Environment | Transportation
Permalink | Email to Friend | Comments (6)
Comments
The provision would allow households making less than $250,000 a year to deduct the interest on auto loans (of up to $49,500) along with state sales taxes on car purchases from their federal income tax.
I wonder what tax credit pedestrian and transit commuters would get.
Posted by: Alon Levy | November 19, 2008 09:07 PM
Peter's at the doorstep of many of America's largest corporations. Peter you ask, Peter Principle. Citicorp, General Motors, Ford, Fannie Mae, Freddie Mac are among a very long list of companies reeling in losses. What do these companies all have in common? Size, size and more size, a direct result of the blinded pursuit of economies of scale without regard to their ability to effectively manage that scale of operation. Like "one hit wonders" in the music industry, these CEO's have armed themselves with a single trick in their repertoire; that being to scale down their workforce. Plan B, panhandle Congress claiming they are "too big to let fail" and will cause irreparable harm to the economy. This is a self-serving argument benefiting the criminal, incompetent, or at least misguided actions of these CEO's.
Why do Boards of Directors buy into their CEO's wishes to simply get larger for larger sake? The argument often made to explain their compliant behavior is the "incestuous makeup" of corporate boards in America. A relatively small band of "directors" gypsy around from company to company. I'll give you a seat on my board if you seat me on your board. is the mindset of this bunch. Is it any wonder the same mistakes are echoed throughout corporate America time and again?
Posted by: Robert Blazek | November 21, 2008 09:55 AM
Mikulsi's proposal is silly on all of the levels you discuss.
One other note Chris Dodd asked the Big Three CEOs about the viability of her scheme early in the week and he was told by them that it would be ineffectual primarily because a main problem facing consumers is their lack of access to credit in the first place.
If you believe the Big Three, their troubles started when the credit markets tanked. If people can't get a loan in the first place, Mikulski's plan is meaningless.
Posted by: H. Bartling | November 21, 2008 12:38 PM
Agreed. I think this is certainly one of those cases in which an effort that seems to (or is even designed to) help consumers, really doesn't.
Posted by: Harry Moroz | November 21, 2008 12:54 PM
Why do Republicans hate American working people so much that they will help foreigners and become American traitors?
Posted by: AT | December 8, 2008 09:05 AM
There is no positive side to credit card use. You will spend more if you use credit cards. Even by paying the bills on time, you are not beating the system! But most families don't pay on time. Credit cards can hit you with more interest charges and fees than most payday loans, whether we like it or not. Americans consume an enormous chunk of personal debt over their lifetimes, through mortgages, cars, and in the last twenty years, credit cards. The interest can pile up quick, along with the total debt burden, and it can stick around for a very long time. If you're not careful, even several dozen payday loans wouldn't pay off your debt. If you want to avoid late fees and more interest, you can use payday loans if you come up short. Read more about credit cards and payday loans.
Posted by: Martin N. | February 12, 2009 03:58 AM