Don't complain; be happy with Cash for Clunkers savings

By KEN MORRIS
Special to The Oakland Press

Just how successful was the Car Allowance Rebate System, otherwise known as Cash for Clunkers program? According to the official government Web site, it was wildly successful.

It claims that nearly 700,000 so-called clunkers were taken off the road and replaced by far more fuel-efficient vehicles. And that $2.877 billion worth of rebate applications were submitted prior to the final deadline, just under the $3 billion Congress allocated for the program.

Many dealers, on the other hand, were not so wildly thrilled. Their main complaint is that the government is way behind on the paperwork. They have not been anywhere near fully compensated in the timely manner they were expecting.

Then there are the consumers, specifically Michigan consumers. How do they feel? To my surprise, I’ve heard complaints from a number of program participants. They’re unhappy that they had to pay sales tax on the full purchase price.

Without question, a new car is a big-ticket item. That means big sales tax, and the state of Michigan coffers likely received a sizeable influx of tax revenue. In a state desperate for revenue, it clearly had to help.

So why complain when the sales tax paid was exactly the same that would have been paid if there were no CARS program? After all, our state tax code has remained consistent.

For example, if you privately sold a used car to an individual, the new purchaser pays tax on it. For a $5,000 used car with a 6 percent rate, the sales tax would be $300. If you traded in that same vehicle at the dealership and bought a new $30,000 car, you would pay sales tax on the entire amount. You don’t get to deduct $5,000.

Some states do let you deduct the value of the trade-in and just pay tax on the difference, but in Michigan it’s always been the full purchase price. You pay sales tax on the entire $30,000 even though there is a $5,000 trade-in.

When you crunch the numbers, the difference is not really all that great. Sales tax on $30,000 would be $1,800. With a maximum credit of $4,500, you’d pay taxes on $25,500, or $1,530. With a difference of just $270, I’m surprised that some Cash for Clunkers participants were disappointed. My personal belief is you should pay taxes on the full purchase price and be happy that you benefited from the program. Don’t find fault with it.

In this economic environment, there are a lot of financial issues to complain about. Having to pay sales tax on the full price of a vehicle shouldn’t be one of them.

The Cash for Clunkers program had a lot of winners, including eligible buyers, state coffers, and an ailing auto industry.

The only loser I see is a national debt that continues to climb at an alarming rate. Hopefully, vehicle sales will continue on their own merit without any tax stimulation. If you benefited from the program, by all means be thrilled and don’t complain.

Be thankful you don’t live in one of the states that collects income tax on the $4,500 credit and enjoy your new car.

Fax your questions to Ken Morris at 248-952-1848 or e-mail to ken.morris@investfinancial.com. Ken is a registered representative of INVEST Financial, member FINRA, SIPC and is Vice-President of the Society for Lifetime Planning in Troy.

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