Monday, August 10, 2009

A Deeper Look at the Cash for Clunkers Program

The Federal government’s new “Cash for Clunkers” program has been getting a lot of attention over the past week. The phrase was trending on Twitter most of last week, and even car dealerships are beginning to use the phrase in commercials and billboards. However, with rumors of a depleted budget, and myths about qualifying, many taxpayers are getting frustrated and confused. To help readers of my blog better understand the program, and see if they qualify, I have put together the following helpful article.

What is It?

Officially known as the Car Allowance Rebate Systems – or "CARS" – the programs was signed in to law by President Obama on June 24th, 2009. Taking examples from similar programs through out Europe, the American version was designed to encourage taxpayers to trade in their high gas-mileage (less than 18 mpg) vehicles for more efficient new automobiles. Depending on how high the new vehicles mileage is the rebate is either $3,500 or $4,500.

Not a Tax Credit

Unlike the Federal incentives for first time home buyers, the Cash for Clunkers program is not a tax credit or deduction. In fact, it is being managed the U.S. Department of Transportation, not the Internal Revenue Service. When a qualifying taxpayer goes to buy a car, the dealership will automatically credit the rebate towards the purchase price. You do not need to claim it on your income tax return, you do not need to request the rebate; the dealership should handle everything.

Who Qualifies?

Qualifying for the Cash for Clunkers program actually has more to do with the car than the car owner, as it turns out. Generally speaking, to qualify your car must have a gas mileage of less than 18 mpg, and be no more than 25 years old. However, CARS has put together a list of the specific vehicles on the market that qualify for the program, click here to download it in PDF. You will also need to provide proof that you were both the registered owner and had insurance on the vehicle for one full year.

New Vehicle Restrictions

If your old vehicle is eligible for the credit, and you can provide proof of ownership and insurance, then you are now ready to begin looking for your new ride! However, remember that you new car needs to meet specific restrictions as well. It must be a new 2008-2010 model, cost no more then $45,000, and it must be a car or truck (i.e. no motorcycles, mopeds, etc.)

Tax Debate

In addition to confusion over taxpayers claiming the rebate, many dealerships have also been confused about the taxes related to the Cash for Clunkers program. In the initial bill, lawmakers apparently forgot to specify whether dealerships had to pay taxes on Cash for Clunkers car deals. Luckily, the mistake was fixed quickly, and car dealerships were disappointed to learn that Cash for Clunkers rebates would indeed need to be considered taxable income. For consumers though, the rebate does not need to be counted as taxable income.

Extension from Congress

Last week there was a lot of speculation that the program had ran out of funds only a few days after it’s launch. However, although the initial $1 billion approved by the President reportedly did not run out, congress has already added another $2 billion to the program. The decision to add more funding to this highly popular rebate system was quick, and mostly bipartisan.

Premature Car Sales

Although the sales made during the Cash for Clunkers program will stimulate car dealerships instantly, some experts warn that these sales were ones that would have been made in the coming months anyways. Meaning that auto sales would likely drop once the program expires. Some bloggers suggest that although the "adrenaline shot" of recovery is certainly useful, the sudden drop in sales a few months away could hurt the slowly recovering economy.

Stimulated Automakers

In addition to encouraging Americans to get behind the wheels of more efficient vehicles, one of the biggest purposes of the Cash for Clunkers programs was to stimulate the struggling auto industry. Thousands of American taxpayers are employed by the auto industry, and by increasing care sales the government is hoping that it will help with unemployment problems. There has been debate about which car manufacturers are being stimulated, since cars produced by Toyota and Honda (both Japanese automakers) both have vehicles making the top list of Cash for Clunkers trade-ins. However, it is important to remember that even though these companies are based out of the country they do employ thousands of American workers in assembly plans and dealerships. Furthermore, Ford and GM both made up a majority of the top 10 list.

Is it Truly Eco-Friendly?

The main goal of this program was supposedly to lower American fuel emissions by encouraging taxpayers to buy more efficient vehicles. However, many argue that it is not having the desired effect. According to CNN, private reports show that most people receiving a Cash for Clunker rebate use it to buy a truck or SUV. Additionally, research for the University of Berkeley shows that most of the “clunkers” being traded in were not being used as primary vehicles. Instead, families are trading in their secondary vehicles which they rarely use.

Little, if any Help for Low Income Americans

Although the Cash for Clunkers rebate system was designed to help low income Americans, many suggest it is having the opposite effect. When a vehicle is traded in under the program, it must be recycled and NOT resold. Therefore, the inventory of used vehicles will decline and many predict that prices of user cars will increase as a result. Since you cannot buy a new car for only $4,500, and many low income families buy used vehicles, many are worried that the program will have a negative impact on struggling Americans. Additionally, according to the Heritage Foundation found that “the average income of those purchasing new cars under the program was $57,700--only slightly below the $61,000 for all new car buyers.”

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