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Crazy E-mail - Cash for Clunkers

CARS LogoI have a bit of a reputation as a skeptic among family and friends, so I end up getting a lot of e-mails forwarded to me just so that I can do the research on them. Usually, a quick visit to Snopes is enough to verify or debunk most, but the latest one I received on the Cash for Clunkers program wasn't covered by Snopes directly, so I had to do some searching on it myself. And as usual with e-mail, it was misleading (some might even say dishonest).

The e-mail argued that taking advantage of the program was a waste of money. Here's the math that's the core of the argument being made in the e-mail:

You traded in a car worth:    $3500
You got a discount of:        $4500
                            -------
Net so far                   +$1000
But you have to pay:          $1350 in taxes on the $4500
                            -------
Net so far:                   -$350
And you paid:                 $3000 more than the car was selling for the month before
                            -------
Net                          -$3350

First, they're making an assumption that your current car is worth $3500. There's no requirement in the CARS program that your car has to be a certain value. In fact, it could be relatively worthless. Here's a list of requirements from the government's CARS site.
http://www.cars.gov/faq

  • have been manufactured less than 25 years before the date you trade it in and, in the case of a category 3 vehicle, must also have been manufactured not later than model year 2001
  • have a "new" combined city/highway fuel economy of 18 miles per gallon or less
  • be in drivable condition
  • be continuously insured and registered to the same owner for the full year preceding the trade-in
  • Moving on ot the rebate value, it's actually variable - either $3500 or $4500, depending mostly on the difference in gas mileage between the new car and the trade in.
As far as taxes, Snopes did cover this one (it's addressed on the government's CARS site, as well). http://www.snopes.com/politics/taxes/clunkers.asp

The federal government won't tax you on it, but some states do. Still, it's not nearly as high as $1350. In Maryland, for example, the tax is the standard 6% excise tax, which is $210 if you got the $3500 rebate, or $270 if you got the $4500 rebate.

The inflated prices is something I can't speak to. I didn't find anything on it in 2 minutes of googling, but I didn't want to waste any more time on it. Given the tone of the e-mail and the errors cited for two of the previous figures, I'll go on record as being skeptical. Besides, it's still a case of caveat emptor. Every individual buyer can bargain with every individual dealer. If you think the dealer's trying to charge you too much, don't buy the car. It's as simple as that. (This inflated cost also has nothing to do with a buyer taking advantage of the CARS program. If someone was looking to buy a new car during that period, they had a choice of doing a straight trade in with their old car, or taking the rebate from the CARS program. Either way, the sales price of the car they wanted to buy was the same.)

This e-mail also left out one other source of money for the buyer - the scrap value of their old car. Here's what the CARS site had to say about that.

Do I get any money for my trade in vehicle in addition to the CARS credit?

YES. The law requires your trade-in vehicle be destroyed. The dealer must disclose to you the scrap value of your vehicle. The dealer is entitled to keep up to $50 of the scrap value for administrative fees. You are entitled to negotiate about who keeps the remaining scrap value. For example, you may use that money toward the price of your new car separate from the CARS credit.

So, one figure was a made up number pulled out of thin air (original value of car), another figure was a complete fabrication (tax), a third figure is uncited (inflated price), and another source of money was left out entirely (scrap value). Let's run through the calculation again, with some different numbers, assuming you're trading in a P.O.S. in Maryland. And even though the inflated price is uncited, we'll be generous and assume that it's actually a real phenomenon, and give it a value of $1000 (and remember, this effect would be present whether you performed a straight trade-in or took advantage of the CARS program).

You traded in a car worth:     $500
You got a discount of:        $4500
                            -------
Net so far                   +$4000
But you have to pay:           $270 in taxes on the $4500
                            -------
Net so far:                  +$3730
And you paid:                 $1000 more than the car was selling for the month before
                            -------
Net                          +$2730

So, in that situation, you'd still make out with almost 3 grand. Depending on the value of your trade-in vehicle, and whether car prices were actually inflated or by how much, there were probably cases where using the rebate made sense, and other cases where it didn't, but this e-mail didn't shed any useful light on the subject.

The full text of the e-mail that prompted this response is available below the fold (slightly corrected for formatting errors).


Subject: Fw: Plausible

Did any of you bite?

The Plan, The Scam, The Man, Don't ya just love it when a plan comes together?

The Scam

Here is what a learned friend had to say about my Democratic Math e-mail. It's even worse apparently than I first thought:

It's way worse than that. Ignore all the gas crap and just look at how the stupid car buyer got taken to the cleaners:

If you traded in a clunker worth $3500, you get $4500 off for an apparent "savings" of $1000.

However, you have to pay taxes on the $4500 come April 15th (something that no auto dealer will tell you). If you are in the 30% tax bracket, you will pay $1350 on that $4500.

So, rather than save $1000, you actually pay an extra $350 to the feds. In addition, you traded in a car that was most likely paid for. Now you have 4 or 5 years of payments on a car that you did not need, that was costing you less to run than the payments that you will now be making.

But wait; it gets even better: you also got ripped off by the dealer. For example, every dealer here in LA was selling the Ford Focus with all the goodies, including A/C, auto transmission, power windows, etc for $12,500 the month before the "cash for clunkers" program started.

When "cash for clunkers" came along, they stopped discounting them and instead sold them at the list price of $15,500. So, you paid $3000 more than you would have the month before... (Honda, Toyota , and Kia played the same list price game that Ford and Chevy did).

So let's do the final tally here:


You traded in a car worth:    $3500
You got a discount of:        $4500
                            -------
Net so far                   +$1000
But you have to pay:          $1350 in taxes on the $4500
                            -------
Net so far:                   -$350
And you paid:                 $3000 more than the car was selling for the month before
                            -------
Net                          -$3350


We could also add in the additional taxes (sales tax, state tax, etc.) on the extra $3000 that you paid for the car, along with the 5 years of interest on the car loan, but let's just stop here.

So who actually made out on the deal? The feds collected taxes on the car along with taxes on the $4500 they "gave" you. The car dealers made an extra $3000 or more on every car they sold along with the kickbacks from the manufacturers and the loan companies. The manufacturers got to dump lots of cars they could not give away the month before. And the poor, stupid consumer got saddled with even more debt that they cannot afford.

Obama and his band of merry men convinced Joe consumer that he was getting $4500 in "free" money from the "government" when in fact, Joe was giving away his $3500 car and paying an additional $3350 for the privilege.

Think this was stupid for those who were crazy enough to swallow this wonderful scheme?

Just wait until we get health care with no additional costs over what most of us now pay for health insurance and the best medical care in the world. Think that scheme might be designed by the same people who came up with Cash for Clunkers?

Regarding that last statement, I think I've already made it clear how I feel about health care.

Comments

In the taxes section, you don't take into account paying property tax on the $15,000 car, vs. the $500 car you traded in.

The point of this entry, and the original e-mail that inspired it, was whether or not it was worth taking advantage of the CARS program, not whether it made economical sense to trade in a $500 car for a $15,000 car (which, of course, is dependent on an individual's financial condition). Any sales or property taxes would be the same whether you used the CARS program or went with a straight trade in.

As an aside, property taxes on cars vary by state. Kiplinger has an article from 2006 covering this (the slideshows no longer work on the original article, but I tracked down one of them, the most important, actually, through the WayBack Machine - State Car Tax Rankings).

As another aside, I really dislike the whole idea of property taxes in principal. But, as a 2006 blog entry from About.com points out, I don't know what realistic alternatives there are for local governments to raise that revenue.

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