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I got an email from a friend about cash for clunkers. I’m not sure who the original author is, but it was quite a compelling read. Here it is:

Cash for Clunkers was hailed as a tremendous success, exceeding all expectations. What a great deal! Take your perfectly serviceable trade, drain the engine oil, fill the engine with a sand solution, and then run it until it self-destructs. And this brilliance only cost the taxpayers $4500 per trade-in destroyed plus about $500 in administrative costs (dealer and federal government combined).

Great, so far so good. What could possibly be more efficient than showering new car buyers with $4500 in taxpayer funded cash? This saves each buyer $4500 on his new car purchase that he can use to purchase other goods and services or put in savings right?

Well………..not exactly.

Any car traded in under this program had to be running and so none of them were worth $0.00 dollars. In fact, if my unscientific reading is correct, the average trade-in sent to the scrap heap by this program would have been worth $3100 wholesale without this program. Uh, OK.

So that means we shelled out $4500 in taxpayer cash plus administrative costs to dole out a net benefit of $1400 to the car buyer, right? Though it’s not looking like such a great deal for the taxpayers at this point, $1400 is better than nothing, at least if you’re the car buyer, right?

Well……………….not exactly.

It turns out that most states, other than California, only charge sales tax on the net difference between a trade-ins value and the new car price. Here in Arizona our sales tax is 9%. All state governments have decided that the $4500 provided by the cash for clunkers program is not a trade-in allowance and is therefore subject to sales tax. So a standard trade in (non clunker) allowance of $3100 actually provides a net reduction in the after-tax new vehicle price of $3380 ($3100 x 1.09). This reduces the net benefit to the average purchaser utilizing cash for clunkers to $1120. A $1120 benefit to one taxpayer that cost his fellow taxpayers $4500. Uh, OK. Is that it?

Well…………..not exactly.

It now comes to light, after the program is finished and the deals are done, (although the dealers have not been paid yet), that there’s more! It has been determined that the $4500 allowance is taxable income to the car buyers who took advantage of it!!!! The non-clunker deal after sales tax allowance of $3380 is not taxable income to the car buyer. The $4500 government allowance is taxable income subject to both federal and state income taxes. Here in Arizona our state income tax is 5%. The top federal tax rate is 35% for a combined income tax of 40%. A high income Arizona car buyer with the average trade in who took advantage of cash for clunkers will pay $1800 in income tax on that $4500 government allowance if he is in the top bracket. Thus a high income car buyer would end up paying a net after-tax penalty of -$680. Even car buyers in much lower tax brackets who live in states like Texas without any state income tax and with a federal tax rate of 28% would still pay $1260 in income tax (28% x $4500) on that $4500. So even for a lower income taxpayer living in a no income tax state, the average net, (after sales tax and income tax), benefit of the cash for clunkers program amounts to MINUS -$140. Uh, OK.

You mean that taxpayers shelled out $4500.00 per car (just under 3 BILLION DOLLARS TOTAL) to provide the average buyer taking advantage of this program a net after-tax PENALTY that amounts to $140.

Yeah………exactly.

Uh, OK. OUCH!!!!!