Recently, Automotive News published an article detailing the cost of a new Auto Bailout program and the $95 billion dollar price tag was very unsettling to me.
This figure represents money already spent on the program by the U.S. government but also includes funds authorized but not yet distributed. So I guess I shouldn’t be upset about another measly $1 billion dollars in taxpayer money being spent on the automotive sector for the Cash For Clunkers program, but I am, and here’s why.
In preparation for Your Auto Networks Calling All Cars radio show, I spent several hours pouring through whatever nugget of valid information I could find on the subject, including reading the law which takes effect July 24, 2009. Then I got to the section of the bill stating the reasons for its implementation which includes 1) efforts to save the environment, 2) reduce greenhouse gases, 3) reduce our dependence on fossil fuels and 4) lessen our carbon footprint.
I’m sure that every little bit helps when it comes to protecting the environment, but it left me scratching my head wondering if we will have to pay a billion dollars each time we want to make a minuscule environmental improvement. Well, this bill does very little to help our environment, so let’s continue to investigate here and figure out who this really does help!
Here are the fundamentals of the program and how the consumer can take advantage of it:
- $1 billion program for the sale or lease of new, fuel efficient cars, SUV’s, vans and trucks.
- Tax credit for cars at $3,500 if the improvement in fuel economy over the trade-in is at least 4 mpg or $4,500 if the improvement is over 10 mpg.
- Tax credit for trucks at $3,500 if the improvement in fuel economy over the trade-in is at least 2 mpg or $4,500 if the improvement is over 5 mpg.
- Consumers may combine this offer with other State and Federal incentives for purchasing hybrid vehicle.
- Only one trade-in per new vehicle purchased is eligible under this program.
- Trade-ins must be in drivable condition, continuously insured and registered to the current owner for the past year.
- Vehicles must have been manufactured within 25 years prior to the trade-in but not later than model year 2001.
- When a passenger vehicle is traded-in, it must have a combined highway/city fuel economy rating of 18 mpg or less to qualify.
- The program is valid through November 1, 2009, or when funds are depleted whichever comes first.
- The program may be extended if Congress allocates more funds.
- The program officially starts on July 24, 2009, however it applies only to vehicles sold after July 1, 2009.
- New car dealerships must register for this program. Many dealerships are already selling vehicles under this program even though the final bill is not in place. If a dealer sells a vehicle under this program before the final bill is posted, the dealer is responsible for any ill effects caused by the early sale.
- The dealer may not use this credit to offset rebates and discounts.
- The trade-in vehicle must be crushed or shredded (by dealer designee) to ensure the vehicle will never be used again. Parts may be stripped from the car before crushing with the exception of the engine and transmission.
- Consumers will not have to claim this credit on their income taxes.
- The new vehicle’s suggested retail price can not exceed $45,000.
- In purchasing a new passenger vehicle under this program, it must have a combined highway/city fuel economy rating of at least 22 mpg.
So, let’s analyze these figures to see what the real story is!
Let’s say the average credit the new car purchaser receives is $4,000. Divide by the $1 billion dollars that have been approved for this program. That equates to 250,000 new cars that could be purchased under this program. Now, let’s divide that by 50 states and that is 5,000 cars per state.
Using Arizona as an example, there are approximately 5 million vehicles registered in the state (including government vehicles). Therefore, this program would get 1/10th of 1% of these Clunkers off the road and provide this incentive to only a small segment of potential participating car owners.
We contacted the Arizona Automobile Dealers Association and were unable to get a definitive answer as to how many new car dealerships are located in Arizona, but let’s guesstimate that there are 250 statewide and 175 will have registered for this program.
This means that each registered dealer could potentially sell 29 vehicles under this program. Frankly, new car dealers make very little money when selling new cars, the majority of their profit is derived from the sale of used cars and their service departments. So, here again, the dealerships are not the big winner in this program. In fact, it does not even provide them with cheap used cars to resell on the lot. I guess that they will have to continue to purchase more used cars at auction.
JD Power forecasts that 10 million vehicles will be sold in the United States in 2009. Therefore this program will apply to only 2.5% of vehicles potentially sold this year. That’s not too bad for the struggling automakers, so let’s call the automakers a major winner in the Cash For Clunkers program.
For the consumer, it could be quite beneficial if they can meet all of the program qualifications. They could purchase a $15,000 economy car and make as much as $4,500 on their trade in under the Clunkers program. After sales tax, registration, destination charges and other fees, they could finance the balance with payments of $250.00 per month on a 60 month loan with a 6% interest rate (for good-credit worthy borrowers) or $3,000 per year. Purchasers are cautioned that they will need to check with their insurance agent to determine any increases that will result in their insurance premiums before making the purchase as well determining whatever increases they will see in the annual State registration fees.
The major winner in this program seems to be the car manufacturers benefiting by a 2.5% increase in sales. And the consumer wins because under the Cash For Clunkers program, they will realize a savings in their fuel cost over the life of the car as well the savings derived by getting rid of their older, high mileage vehicle.
This analysis indicates that this bills original intention of achieving a meaningful positive impact on the environment is the Clunker!
After all of this research, I wish that I could say that I’m happy knowing where the billion dollars is going, but I keep remembering what some wise statesman once said ”a billion here, a billion there and sooner or later it’s a lot of money.”
Cary Lockwood of www.yourautonetwork.com is an automotive consumer advocate and the host of Your Auto Network’s Calling All Cars radio show on KXXT 1010 AM Phoenix and KXEG 1280 AM Phoenix. Cary is also on the Better Business Bureau’s Auto Repair Advisory Committee. Cary has over 30 years in the auto industry as an engineering technician at G.M. as well as being an auto repair shop owner for 10 years. You can download the radio show by going to www.yourautonetwork.com You can also post your automotive questions through the contact page of the website.