Will “cash for clunkers” be a clunker of a deal for taxpayers?

May 24, 9:29 AMFord ExaminerMike Karagozian

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 How much cash for this old clunker?

"Senator Debbie Stabenow (D-MI), Senator Sam Brownback (R-KS) and six other Senators introduced bipartisan legislation that would put in place a consumer incentive for trading-in a less fuel-efficient vehicle for a new, more fuel-efficient one. The language of the bill is similar to the bipartisan amendment adopted 50-4 by the Energy and Commerce Committee."  – Press release from Ford Motor Company.

UPDATE #1:  Cash for Clunkers bill passed in the U.S. House of Representatives.  Read more here.

UPDATE#2:  House and Senate negotiators agree on Cash for Clunkers legislation; include it in Afghanistan/Iraq war funding bill Thursday night.  Cash for Clunkers gets $1 billion funding - could pass next week. Read more here.

UDATE#3:  Ford Motor Company launches Cash for Clunkers consumer website.

Not always “as advertised”
“Cash for Clunkers” is coming.   Taxpayers would be wise to wait and see the fine print on this bill because rebate and tax credit programs often aren’t as advertised. Consider this example: Back when Jimmy Carter was president, a homeowner’s energy tax credit was announced with much fanfare. Taxpayers could claim a tax credit for home improvements that saved energy. The way it was portrayed, it sounded as though the government was going to pay for your home improvements. Since my wife and I needed new storm windows anyway, we purchased them and then applied for the credit on our income taxes that year. After filling out the forms and doing all the calculations, factoring in our income, etc., we qualified for a tax credit of only $38.00. We mailed the IRS form, our 1040 and the receipts as instructed. It didn’t take long for the first letter from the IRS to arrive, demanding additional documentation and threatening us with interest, penalties and an audit. 

History has a way of repeating itself.  The rebate will be “up to $3,500"  or "up to $4,500."  The operative words here are “up to.” Anyone who has read the fine print in a cell phone ad or a cable TV ad knows what “up to” really means.

Made in North America
What is the true goal of Cash for Clunkers?  There seems to be a tug-of-war going on between various special interest groups as to whether Cash for Clunkers is intended to help boost auto sales in general, boost domestic auto sales, or conserve gasoline and reduce pollution.  The fuel-economy improvement thresholds - as currently proposed - are high enough that foreign brands stand to benefit more than domestic brands because their vehicles are generally smaller and more fuel-efficient.  One version of the bill stipulates rebates would apply only to vehicles  "assembled in America."  If the goal is to help domestic auto makers, will Ford Motor Company products assembled in Mexico (Fusion, Milan, Lincoln MKZ) be excluded from the “Cash for Clunkers” program?  Will Hondas built in Ohio qualify for the program?  There are lots of unanswered questions and it all depends on whether the House or Senate version of the bill becomes law.

No skin in the game means increased risk
Under the proposed guidelines, the government cash goes directly to the dealer who sells the new vehicle, not the purchaser. The government’s logic is that this $3,500 to $4,500 rebate can be counted as cash from the buyer, which would help buyers get credit because they're financing less.  On paper, someone who puts $3,500 or $4,500 down on a car loan sounds like a good credit risk, right?  The only problem is, this isn’t really cash from the customer.  Finance companies (the smart ones, anyway) are wary of deals where people don't put down any of their own money on a loan.  In the finance business this is called having “no skin in the game.”  With none of his/her own money invested, the customer can take delivery of a brand new vehicle, and if they can't make the payments, simply walk away without losing a thing.  Then the finance company has a costly repossession to deal with -- assuming the vehicle can be located and hasn't been trashed or stripped.   Unfortunately, too many dealers, desperate to make a sale, will pressure their finance sources to buy these deals even if the only money put down is the government-provided Cash for Clunkers money. 

Now that the government essentially owns GM, Chrysler and General Motors Acceptance Corporation (GMAC), will there be pressure on auto manufacturers, captive finance companies and banks to approve car loans for people who can't afford them the same way banks were pressured to make mortgages available?  Will auto finance companies be threatened with Justice Department investigations the same way banks were threatened?  Will the CEOs of Chrysler Financial, Ford Credit and GMAC be summoned to Washington to testify before a Congressional committee and explain why they aren't approving more car loans under the Cash for Clunkers program?

SEMA weighs in
“Cash for Clunkers” will likely generate lots of headlines and make for great copy.  Will it be another one of those programs that turn out to be not quite as good as advertised?  Will there be unintended consequences?  SEMA (Specialty Equipment Market Association), the nation’s most influential automotive specialty parts and accessories trade association, claims Cash for Clunkers will be costly in terms of jobs. “Scrappage programs as proposed will...hurt thousands of independent repair shops, auto restorers, customizers and their customers across the country,” said SEMA Vice President of Government Affairs Steve McDonald.

Before everyone’s heart goes atwitter over Cash for Clunkers, it would be wise to wait to see what is actually written into law. 

Learn more
Here is a list of questions and answers about Cash for Clunkers. 

Clunker photo by Mike Karagozian