Don’t Attach the Wrong Strings to the Auto Bailout

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.