DMI Blog

Harry Moroz

Autos, Houses, Gimmicks

Senator Barabara Mikulski of Maryland was back at her old tricks this week in the Senate (where, to be sure, terrible legislation was in no short supply). Back in November when Congress was considering the auto bailout, the Senator proposed making the interest on auto loans, along with sales taxes, deductible from a household’s federal income tax. The legislation is designed to save jobs at car dealerships, save consumers money, and boost sales tax revenues. The Senate voted to include the tax break in the stimulus package. In November, I pointed out:

But people aren’t buying [cars] 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.”

The above still applies. But the inclusion of this provision in the stimulus package is indicative of how off-track debate about the stimulus has become. The public conversation has been dominated by how fast the stimulus will take effect, as if we haven’t been talking about stimulating the economy for the last year. News organizations and liberal bloggers alike rejoiced when the CBO’s scoring of the Senate version showed that 78% of spending would be complete by 2010 instead of 64%. No matter that this quicker spend-out rate comes from a tax cut – the increased AMT exemption – and an adjustment of when state fiscal stabilization funds become available.

Indeed, Mikulski used the same “fast-acting” language to argue for her tax cut: “This is the only proposal that will have an immediate, significant affect [sic] on the demand for new cars.”

One of the three tenets of stimulus is timeliness. But should we really sacrifice longer term effectiveness for timely “affect”? How many middle-class households are really going to run out and buy a car because of a tax deduction on their auto loan’s interest? How many middle-class households, for that matter, are going to run out and buy a house (did I miss our defeat of “the housing crisis”?) because they receive a $15,000 nonrefundable tax credit? We are still providing such incentives in a country in which a measly 27% of those eligible for a tuition deduction or tax credit for college actually claim it.

We are trying to incentivize certain behavior (worthwhile in the case of college education, shortsighted in the case of buying more cars). But Congress still cannot contemplate another way to do this besides tax gimmickery.

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Posted at 10:23 AM, Feb 06, 2009 in Economy
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