At Issue: Should new-car loans be tax deductible?

YES

NO

Sen. Barbara A. Mikulski, D-MD
Written for CQ Researcher, February 2009

We are confronting the most severe economic crisis in generations, and we must act quickly and boldly to confront it and create and save jobs.

That is why I introduced an amendment to the American Recovery and Reinvestment Act (ARRA) that creates a tax incentive to encourage people to go into auto showroom.

Why is this a good idea? If someone buys a car, someone’s got to make it, someone’s got to service it and someone has to provide administrative support. Stimulating Americans’ demand for new cars will save jobs up and down the automotive supply chain.

Before I introduced this proposal in the Senate, I visited an automobile dealership in Maryland. A receptionist told me, “Barb, I’ve worked here on and off for 43 years. I’ve been able to raise my kids, I’ve earned a good living, I did the back-office work, and I want to keep doing it. I’m not ready for Social Security, and for God’s sake, don’t put the money in Wall Street. I want to keep working.”

Right now, our automobile industry is languishing. Last month U.S. auto companies posted their lowest sales totals in more than two decades. The Big Three are at risk of going under, which could cost the government around $156 billion over three years in lost taxes and unemployment benefits. Even worse, the auto industry’s collapse would also cost around 3 million Americans their jobs, their health care and their hope for a secure retirement.

Unlike other tax and spending provisions in the ARRA, my provision doesn’t spend taxpayer dollars in ways that may not even help the economy. It only costs the Treasury money when someone buys a car.

My amendment also helps states struggling with their bleakest budget outlook in decades. States rely on tax revenues from new car sales to finance infrastructure projects and other big-ticket spending items. In many states, the sales tax is around 6 percent, meaning that when a resident purchases a $25,000 car, the state gets $1,500 in revenue.

I was overjoyed when in a bipartisan vote 70 of my colleagues joined me in support of my amendment. I will continue to fight to keep it in the final economic-recovery package that is signed by President Obama. We’ve helped the sharks and the whales. Isn’t it about time we started helping the minnows?

Daniel J. Ikenson, associate director, Center for Trade Policy Studies
Written for CQ Researcher, January 2009

By allowing car and truck buyers to deduct auto loan interest expenses and sales taxes from their income tax bills, the Mikulski amendment is intended to spur automobile purchases. And that, according to Sen. Mikulski, would “save jobs in the American automobile industry, help consumers and get our economy back on track.”

But the amendment is unlikely to spark that chain of events. Although an allowance to write off interest payments and sales tax theoretically could boost sales, the evidence strongly suggests that the impact would be negligible. After all, most auto producers have been offering better incentives that that – like zero percent financing. And dealerships have slashed prices – in some cases well below cost – to induce purchases. Yet, sales continue to decline. It’s hard to imagine how tax-deductible interest payments would spur auto purchases when forgoing interest payments altogether hasn’t.

Even if Mikulski’s plan did spur sales, the impact on jobs would be indiscernible. Producers would attribute new revenues to the temporary demand stimulus, not to a structural demand shift. Accordingly, they would have no incentive to invest and hire more workers – or to slow plant closures or the dismissal of workers. Just look at what happened to business investment and employment after the Bush rebate checks were issued last spring. They both continued their declines, paying to heed to the $150 billion stimulus package.

General Motors and Chrysler have already received taxpayer funds, which are being used to subsidize demand in the form of price cuts and interest-free loans. Further subsidizing price cuts through tax deductions will only increase the industry’s reliance on government gimmicks and defer the necessary reforms.

If Congress really wants to help the auto industry recover, it should take a look at the supply side of the equation. Carmakers have been burdened with costly, inefficient rules both imposed by Congress and agreed through labor negotiations. Fuel-efficiency mandates, for example, compel automakers to produce vehicles with low or no profit margins. That hurts the bottom line and discourages investment and hiring. Inflexible, inefficient union work rules and near-full compensation for idled workers have also contributed to the industry’s red ink. A bankruptcy judge could help sort that out.

Reducing costs and getting the incentives right on the supply side are keys to industry revitalization. But that process is only hampered by policy makers who claim their snake oil can insulate us all from every economic ache and pain.