Cash for Clunkers: Winners, Losers

On June 18, the Senate passed H.R. 2346, which includes Title XIII, the Consumer Assistance to Recycle and Save Act of 2009 (CARS), more commonly known as “Cash for Clunkers.” The stated purpose of the House version of is “To accelerate motor fuel savings nationwide and provide incentives to registered owners of high polluting automobiles to replace such automobiles with new fuel efficient and less polluting automobiles.”

The CARS Act is part of the much larger $104B Supplemental Appropriations Act, also known as the War Funding Bill. It is expected that President Obama will sign the compromise agreement that will pay for, among other things, $1B worth of electronic vouchers to offset the lease or purchase price of new cars and trucks.

While there are still many unanswered questions, it is clear that there will be winners and losers.

Winner – Retail new car and truck dealers. Without a doubt, new car dealers will benefit when car buyers enter their dealership with an additional $3,500-$4,500 in retail incentives provided by the federal government. The infusion of $1B (less $50M for administration costs) from July 1 to November 1, 2009 will certainly stimulate sales regardless of qualifications to purchase.

Loser – The American taxpayer. Although 250,000 or so American taxpayers will take advantage of a windfall tax free incentive to purchase a new vehicle, the benefit for those few will need to be paid for by the many American tax payers. A case can be made that 250,000 gas-guzzlers will be off the road and that jobs will be created. However, because of foreign trade agreements, shoppers will be able to buy both foreign and domestic vehicles sharing some of the program’s benefits with foreign manufacturers.

Winner – Gas-guzzler owners. Not everyone with an old car and the financial capacity to trade will qualify for vouchers to buy a new car. An “eligible trade-in vehicle” must be in drivable condition, continuously insured and registered to the same owner for at least one year prior to the trade-in date, model year 1984 or newer, and in the case of a car, has a combined fuel economy rating of 18 mpg or less. Moreover, the value of the vehicle should be less than $3,500 or $4,500 depending on the vehicle, for the deal to make financial sense. Dealers are required to disclose their best estimate of the scrappage value of the customer’s vehicle as a condition for accepting the voucher as payment in the trade.

Loser – Low-income drivers. People who can’t afford the cost of a new vehicle may lose in two ways. First, Cash for Clunkers vouchers can only be used for a new vehicle purchase. Gas-guzzlers cannot be traded for used vehicles with good mpg ratings. Second, by taking 250,000 or so of the least expensive cars and trucks out of circulation in a four-month period, it is likely that there will be a shortage of inexpensive vehicles for folks without much money. BHPH dealers, already struggling to find good quality older used cars, will see that struggle intensify to serve the needs of their credit-challenged customers.

Winner ­– Salvage dealers and auto parts recyclers. Car dealers are required to certify that eligible trade-in vehicles will be crushed, shredded or dismantled in such a way that the engine and drive train (with a few exceptions) are inoperable for future use. Dismantlers are permitted to sell the other parts and retain the profits including the proceeds from recycling. Titles have to be processed correctly to avoid penalties in future audits, but done correctly, there is potential for profit in the salvage vehicles.

Loser – Unscrupulous Car Dealers and Consumers. No doubt some dealers and some consumers will attempt to shortcut the system to take advantage of the Cash for Clunkers program. Dealers who participate in the program will have to register with the National Highway Traffic Safety Administration and by doing so agree to the terms of the CARS Act. The NHTSA has been directed to work with the Secretary of the Treasury and the Inspector General of the Department of Transportation to prevent and penalize fraud under the program. Dealers can combine vouchers with other incentives but cannot replace other incentives or charge extra fees when accepting Cash for Clunkers vouchers. Fraud penalties can be assessed up to $15,000 per violation.

How many “eligible vehicles” will be traded in by consumers who can afford or have the desire to buy a new car or truck in the next four months? We should know soon.