Economic stimulus includes new car incentives

Consumers are expected to receive a tax break for the purchase of a new car this year but it may not have much impact on the steep decline in auto sales.

The $787 billion economic stimulus, which Congress was considering Friday, would give consumers a state sales tax and excise tax deduction on new cars purchased before the end of 2009. Many new car buyers could see savings of hundreds of dollars in next year's tax filing.

The incentives, worth $1.68 billion, were designed to boost auto sales and increase traffic in dealer showrooms during a dark period for the industry. General Motors Corp. and Chrysler LLC are living off of billions of dollars in government loans and must convince the Obama administration that they can emerge as viable companies.

"No matter how much government aid we give to the Big Three automakers, they can't survive if consumers don't start buying cars," said Sen. Barbara Mikulski, D-Md., who sponsored the legislation.

A car buyer's savings will vary depend on financing terms, state and local sales tax rates and the buyer's income. Mikulski's office estimated a family with an income of $250,000 a year would save about $600 on a new $35,000 car.

Tax preparer Jackson Hewitt Tax Service Inc. estimated that a single taxpayer earning $40,000 a year would save $300 in taxes on the purchase of a $20,000 car. A taxpayer earning $80,000 annually would save $485 in taxes when buying a $30,000 car.

Dealers say they will use the tax deduction as a selling point, but they don't see it as a major boost to sales, which fell 37 percent in January compared to the previous year, dropping to the lowest levels in nearly three decades. In January, Chrysler's U.S. sales dropped 55 percent and General Motors saw U.S. sales fall 49 percent.

"At the end of the day, I'm not sure this is enough to do it," said John Hawkins, who owns eight dealerships in the Los Angeles area. "On the other hand, anything is probably better than nothing."

An analysis by automotive consulting firm R.L. Polk & Co. predicted the tax incentive would increase U.S. light vehicle sales by 94,000 units this year - roughly 1 percent based on current projections of about 9.6 million annual sales, according to Autodata Corp. R.L. Polk said consumers would receive an average rebate of $330 for each new vehicle purchased.

Families who earn less than $250,000 a year, or $125,000 for individuals, can qualify. The tax break applies only to the first $49,500 of the purchase price and the deduction is "above-the-line," meaning it can be used by taxpayers who itemize their deductions and by those who do not itemize.

The final version of the bill does not include a deduction on the interest of a loan for a new car, which would have provided a more generous benefit. Polk estimated if the loan interest had been included, the average rebate would have been $1,250 per vehicle and boost sales by 359,000 units in the U.S.

"Sales are so depressed now and consumer confidence has been low that I think it's important that something is included for auto sales," said John McEleney, a Clinton, Iowa, auto dealer who is chairman of the National Automotive Dealers Association. "We would have liked to have the whole loaf but I'm happy we got what we did."