Jon Michaeli’s Blog


New Auto Tax Credits are Far From Optimized

This post is a bit off-topic for me, but as I recently bought a CPO (certified pre-owned) car, I was directly impacted, and admittedly I am slightly bitter.

Have you heard of Obama’s special 2009 tax break for new car purchases? It allows people to deduct state, local and excise taxes on their 2009 tax returns.

Here’s my beef.

If the deduction is primarily intended to help struggling US auto makers, then why make the credit applicable on imports as well? Since domestically produced cars cost less on average, the consumer benefit in absolute dollar terms will on average be greater for foreign car purchases.

If the deduction is primarily intended to stimulate consumer demand, then why make it applicable only on new cars? Relative to disposable income, the deduction is more meaningful to lower income individuals and families – who are more inclined to purchase a used car – than Americans buying $50,000 luxury sedans and SUVs (Note: $50K is the threshold where the tax benefit ends). And since relief is on a percentage basis, including pre-owned cars would not likely discourage discerning consumers from spending a premium on a 2009 model.

Aside from these arguments, if consumers deem the credit meaningful enough so as to alter their buying behavior and upgrade from used to new, used/new car inventory would go out of balance (esp. given heavy discounting on new cars today). If used car inventory levels creep up, automakers will lose pricing power on new vehicles. Naturally, the market would correct for this, deflating used car prices until the balance is restored. Unfortunately, the burden ultimately falls on the consumer, who now collects a lower price for his used car when he looks to trade it in to the dealer or sell it to a private party.

Advertisements