The fiscal cliff is all the talk in Washington, D.C., nowadays since lawmakers must decide if the Bush-era tax cuts and a 2-percentage point payroll tax deduction among other elements will be extended by Jan. 1. Kelley Blue Book did some calculations recently to find out exactly what these tax issues mean to a typical consumer, and more importantly, to a potential buyer at a dealership.
Senior market analyst Alec Gutierrez figures a 2-percent bump in taxes on a household earning $100,000 per year would equate to $2,000 per year in additional taxes, or roughly $166 per month.
“This sum is equivalent to a lease payment on a brand-new subcompact and covers about half of a typical car payment on a midsize sedan,” Gutierrez said. “If this tax break is allowed to expire, given the fact that many household budgets already are stretched as far they can go, this could put some buyers on the fence about staying out of the market.”
If, in fact, the tax cuts are allowed to expire, Gutierrez fears the population could see an already sluggishly growing economy slump into reverse.
“This is bad news for those banking on vehicle sales continuing their recovery into 2013. While each of these tax cuts could negatively impact the auto industry if allowed to expire at the end of this year, the payroll tax holiday is perhaps of most importance to the average car buyer,” Gutierrez said.
Unless the economy slips back into recession, KBB indicated the industry is still bullish on new-vehicle sales for 2013.
Kelley Blue Book expects an annual increase of 300,000 to 500,000 consumers reaching the end of their lease term in 2013, which should help drive sales even if economic growth slows down.
Kelley Blue Book also anticipates consumers impacted by Hurricane Sandy will continue to seek replacement vehicles into 2013, which will help keep demand strong.
“Now that the election is behind us, the nation will be waiting on pins and needles as the -resident and Congress work together to address the looming fiscal cliff,” Gutierrez said.
Ford’s Perspective on Fiscal Cliff
Executive chairman Bill Ford told Bloomberg earlier this week that a deal between President Barack Obama and Congress to avoid the fiscal cliff is critical to the U.S. economy’s health
“It’s vitally important for the economy that we work this out,” Ford said in this online report. “I clearly hope we get some bipartisan effort to avoid the fiscal cliff.”
Ford chief executive officer Alan Mulally joined other business leaders who met with Obama recently to discuss the assortment of tax increases and other legislative changes that would take effect at the end of the year.
Bill Ford reiterated to Bloomberg that the fiscal cliff could threaten the hopeful recovery of the U.S. economy.
“It’s going to help the country,” Ford said. “Ford is not isolated from what happens to the rest of the economy.”
Edmunds.com Not Expecting Major Changes
Edmunds.com chief economist Lacey Plache thinks the likelihood is not high that all of these tax changes will occur.
“President Obama repeatedly has proposed extending the majority of these tax cuts for most taxpayers,” Plache said in an analysis.
The site’s economist said Obama likely will extend the lower Bush-era income tax rates, dividend tax rates and capital gains tax rates for the 98 percent of taxpayers earning less than $250,000 in annual income if married and less than $200,000 in annual income if filing single.
“President Obama also supports eliminating itemized deductions for housing, healthcare, retirement and childcare for only individuals with more than $1 million in annual income, and limiting the benefit of itemized deductions to 28 percent for only taxpayers in higher rate brackets,” Plache said.
“In short, his preferred changes would be targeted at upper income Americans and preserve the status quo for the middle class and below,” she continued. “The Republicans, on the other hand, have strongly objected to tax increases for any income levels, supporting spending cuts as a means to reduce the deficit.
“Currently, the potential compromise that comes up most frequently is to limit tax rates changes to households with more than $1 million in annual income and make up the difference with cuts to entitlement spending,” Plache went on to say.
So what does that debate mean for a dealer wanting to turn inventory?
“The likely tax rate changes should not substantially lower car sales in the near term,” Plache said. “In the longer run, though, the growth of car sales could slow if higher tax rates for the ‘wealthy’ result in enough less spending and investment that job cuts result.”
To read more on what Plache had to say, see her analysis here.