Meg Thomson
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Senate Tax Reform Bill Offers Car Dealerships a Massive Tax Break, But at What Costs?

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Unless you make a conscious effort to avoid politics around every corner, you’ve probably heard about the new tax reform bill making its way through Congress. This bill is designed to provide tax cuts for large corporations. However, car dealerships don’t exactly fit the traditional corporation mold. Car dealerships are franchise-owned businesses. They purchase vehicles from manufacturers (OEMs), like Ford and General Motors, and sell them directly to customers. However, car dealerships don’t purchase the vehicles outright—they use loans.

The tax bill in its original form placed a cap on corporate deductions for interest payments at 30 percent of a company’s income. In the past, dealerships have been able to deduct 100 percent of their interest payments when they filed their taxes. This new cap would have caused taxes to skyrocket for car dealerships, since most of their business is done using loans. In order to compensate for the higher taxes, dealers wouldn’t be able to keep as many cars in their inventory.

However, just a few hours before the vote on Friday night, everything changed.

The National Automobile Dealers Association (NADA) lobbied for an amendment that would allow dealerships to be an exception to the rule. This amendment was put forward by Senator Rand Paul (R-KY) and accepted into the Senate’s form of the bill. “Senator Paul’s leadership on this issue was critical to ensuring that 100 percent floor plan deductibility was included in the tax bill,” said NADA.

Allowing auto dealers to be excluded from this limitation goes against the entire purpose of corporate tax cuts, says TaxVox editor Howard Gleckman. The theoretical reason for lowering corporate tax rates was to eliminate the need for industry-specific tax breaks. The inclusion of this amendment was an effort by Republicans in Congress to pull in votes from on-the-fence Senators like Rand Paul. “It’s not surprising [the amendment] was included,” said Gleckman. “Congress has been doing this since there’s been tax legislation.”

So what’s the downside?

Well, in order for car dealerships to receive a tax cut, the government has to get that money elsewhere. While this tax bill offers massive tax breaks to corporations, an analysis by The New York Times found that taxes will rise for an estimated 25 percent of middle class families next year, and an estimated 33 percent of middle class families will see an increase in their taxes by 2026.

According to Lily Batchelder, a professor and tax specialist at New York University Law School, “Americans are especially likely to face a tax increase if they have a smaller family, have mostly wage income instead of investment income, or claim some of the many deductions that the bill repeals, like those for state and local taxes.” Batchelder points to the focus on corporations in the bill, too. “They are increasing taxes on many in the middle class, while concentrating their tax cuts on the wealthy.”

News Sources: CNN Money, The Kansas City Star, The New York Times