Commentary

Should New Car Loans Be Tax Deductible?

This is half of a larger debate between Daniel J. Ikenson and Sen. Barbara A. Mikulski (D-MD).

This article appeared in the CQ Researcher on February 6, 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.

Daniel J. Ikenson is associate director of the Center for Trade Policy Studies at the Cato Institute.