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Cash For Clunkers Program

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Beater Used CarUpdate: The bill has passed both chambers of Congress, getting through the Senate on Thursday, and President Obama is expected to sign it into law soon.

The Cash for Clunkers program would provide a voucher worth $3,500 to $4,500 to consumers trading their vehicles in. The vehicles have to be in running condition and get less than 18 miles a gallon in fuel efficiency. The value of the voucher is determined by this schedule:

  • For passenger cars, the new car has to get at least 22 MPG (EPA combined MPG). You get the $3500 voucher if you get an improvement of at least 4 MPG, $4500 for at least 10 MPG.
  • For light duty trucks, SUVs, and minivans, the new vehicle has to get at least 18 MPG. You get $3500 for an improvement of at least 2 MPG, $4500 for an improvement of at least 5 MPG.

Here’s the WSJ chart describing the benefit:
WSJ Cash for Clunkers

The bill has two purposes:

  1. Removes older, less efficient cards from the road. Many of the cars that qualify are probably worth less than the $3500 or $4500 voucher, so consumers are still holding onto them because it makes sense to. This would give that added incentive to upgrade.
  2. Increases sales of new cars.

There are downsides to the bill though – the bill would call for the cars to be crushed and the vouchers would only applicable towards the purchase of a new vehicle, rather than a used one.

I like the idea of it but I think we’re creating a lot of special tax credits that prop up various industries. Also, not everyone is able to take advantage of these new credits, which is a bit unfair. The prime example is the $8,000 first time homebuyer credit, which was created to artificially boost the housing sector. Now we have this proposed $4,500 credit that will only help people who are close to buying a new car.

What do you think?

(Photo: wickenden)

{ 57 comments, please add your thoughts now! }

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57 Responses to “Cash For Clunkers Program”

  1. Geoff says:

    My real problem with this is the fact that few cars over the past 15 years have gotten 18 mpg or less, as required by the law for a trade in. It makes this whole thing pretty dumb.

    If the mileage for your tradein was more like 25 mpg, that would make more sense.

    Also, I see this more as an environmental program than economic, although it does both.

  2. Ben says:

    Does it cover buying a motorcycle? Great MPGs on a moto.

  3. Not a big fan of this. This is just wasting tax payer money IMO.

  4. Jason says:

    I have a 1996 Ford explorer with 230k miles which gets 14-city 18-highway. What would a 4500 tax credit do for me when I file my taxes at the end of the year. I will make about 20k when the year ends (25k salary but I started in march( :-( )(so much for that Bachelors degree) I don’t know how tax credits translate into how much your actually saving or getting, I dunno

    • ladam8518 says:

      It would depend on the classification of the credit.

      If it is a non-refundable credit your tax liability would be reduced by the credit until the liability was zeroed, then the rest of the credit is lost.

      If it is a refundable credit you get the entire amount. First it will be used to zero out tax liability and then the balance will be included in the tax refund.

      Example:

      I am assuming filing single with no dependents, semi-monthly pay, and that you claimed a withholding of 2 on your W-4.

      10 months @ $25000 per year is $21,000
      $25,000/24 = $1,041.67 per pay period
      Using the Withholding Tables this amounts to a federal withholding of $60 per period.

      Estimated Taxes:
      Gross Income: $21,000
      Personal Exemption: ($3,650)
      Standard Deduction: ($5,700)
      Taxable Income: $10,650

      10% of first $8,350 = $835
      15% of $10,650 – $8,350 = $345
      Total Tax on Income: $1,180

      Withholding: 20 * $60 = $1,200

      Estimated Refund: $20 (No Credit)
      Estimated Refund: $1,200 ($4,500 Non-refundable Credit)
      Estimated Refund: $4,520 (Refundable Credit)

      In this case the $4,500 credit is worth $1,180 as a non refundable credit and face value as a refundable credit. As tax liability increases, so does the value of non-refundable credits, up to the point that the tax equals the credit.

      The tax brackets, exemption, deduction, and withholding estimates for 2009 come from information found at http://www.irs.gov.

    • Chris says:

      Fortunately, the credit is given to the Dealer and not to you. They have to claim the credit as income, not you! This means NO tax implications for you.

  5. eric says:

    This could work for those huge gas guzzlers..

  6. I drive a 2004 Toyota Camry. It gets about 26-28 mpg. There really aren’t many cars out there that I could trade this for. Even hybrids don’t beat that by 10 mpg. Too bad. Getting a new car is fun.

  7. Lucy says:

    Thanks. Will tip my parents off on this new program.

  8. Mark says:

    Law of Unintended Consequences:
    Used Clunkers just went up by $4,500. Those parents of those poor teenagers won’t be able to afford to buy them a car.

    This has to be one of the dumbest government ideas ever. With the amount of taxes I pay each year to the federal government, I am financing 5 cars…to get a minimum of 10 mpg of savings???
    Someone needs to tell those 535 idiots that we have in Congress that we are broke. Luckily, the bond market is about to do that for me.

    • thomas says:

      One of the dumbest? While I share your sentiment that it is ridiculous, it certainly isn’t in the top ten. We have so many great things to choose from.

  9. I also read that the bill contained a provision for permanently destroying/disabling the trade-ins, thus not allowing them to be sold for parts at junkyards (not sure if that stayed in the final bill).
    That would definitely have unintended (or intended) consequences that would hurt alot of the people that repair their own cars and go to junkyards to find great deals on parts. You can argue that you’re forcing more and more low fuel efficient cars off the road as fewer parts become available. But in reality you’re really hurting a lot of people that are trying to save money, and recycling old parts at the same time.

  10. Tom says:

    When this is completely through Congress, I wonder if it will become the “GM cars for clunkers” program instead of cash.

    I don’t like this bill either — it will have such a small benefit in fuel economy, and really it just feels like a thinly veiled stimulus package for the auto industry.

  11. thomas says:

    I would like the federal government to stop spending my tax dollars on items that should not be decided in Washington.

  12. This is the government artifically stimulating demand by removing supply . . .

    The real kicker will be when we find out that the old vehicles are being resold in some corrurpt scheme with some politician’s relative involved.

    You may laugh at that idea, but don’t forget that you heard that here first!

    • Jim says:

      Hahah, or some politician’s family owns a chop shop or a bunch of old clunkers they need to get rid of. All the cars on blocks in the yard suddenly have value… $4500 to be exact. :)

  13. Martha says:

    I’m not sure how much this helps the enviroment since it does take petroleum and energy to make a new car so where is the line where a car is so old that getting a new one with better MPG is a + for the environment? Has anyone looked at this before?

    • ladam8518 says:

      Probably not. When Hybrids started touting the better for the environment claims, reports came out showing how damaging the manufacturing process for the batteries was to the environment. If you include battery manufacturing in the scope of an environmental impact study, driving a fleet of Chevy Suburbans has less impact than a single Toyota Prius due to the hazardous materials needed to manufacture the batteries. I have read some of the reports, but unfortunately can’t find them right now.

      It’s similar to the corn ethanol feasibility studies, throw out scope until it meets your predetermined results.

    • Katrin says:

      What about all the waste (ei old cars) create?? I completely agree w/ you… not very earth friendly. :(

      • Karen says:

        Not to mention what we do to store old batteries in the future…that will be an environmental hazard.

        • Wizard Prang says:

          Unlike the pollution from petrol-powered vehicles, at least the batteries can be stored in one place – preferably under a mountain like nuclear waste is currently stored.

          Yes, it’s not pretty, but until we have fully-electric vehicles, it’s the best option that I can see; do you have a better one?

          • ladam8518 says:

            Since I design and build power plants (clean, coal-fired plants) for a living, I am hoping to see fully-electric vehicles in the future. The power has to come from somewhere and I am a part of the cleanest and cheapest source of electricity. Of course, there seems to be more outrage over power plants than personal vehicles when it comes to pollution.

  14. Diasdiem says:

    Is there a limit to how many old cars you can trade in? Because I can see some people going around the classifieds or Craigslist buying old POS rattletrap cars for peanuts, and then turning around and trading them in for $3500-$4500 credit apiece. Hell, if it were retroactive I’d do it, because I got a new car just a year ago.

    • Lena1962 says:

      Don’t mean to pop your bubble Diasdiem. You must show proof of insurance and registration for a year……..If you can’t do that, then you cannot cash in your clunker….

  15. Corey says:

    You say the new car has to get at least 22 MPG. Does this mean a “new” (2010) car, or a new (slightly used)car to me?

  16. Jeff says:

    They have been doing this in Germany for a little while. Was an article about it in the Wall Street Journal a few months back. And I don’t think Germany was the first place, the article mentioned other countries that had done this before.

    At least I think it was the WSJ, it may have been the economist. Anyway, I know I read it somewhere.

  17. Matt SF says:

    I think it’s a dumb idea… unless you’re in the car business.

    Wait, didn’t the U.S. government just buy a car company?

  18. Wizard Prang says:

    I am not sure what problem this is intended to solve. If you want to remove old, inefficient vehicles, introduce a scrappage allowance without the requrement for a replacement. As implemented, it will not generate new sales so much as subsidize existing ones.

    It may drive more buyers to the dealers, but it will be ALL dealers, not just GM and Chrysler (neither of whom makes a car I want to buy at a price I can afford).

    In the long run, it will simply push up the cost of all new vehicles by a few thousand dollars as the Dealers find new ways to grab a bigger slice of a bigger pie.

    As for me, I still drive a seventeen-year-old car that gets about 30MPG on my daily commute. How many new cars can do that?

    Like most hare-brained Government subsidies, this one is rife with unintended consequences.

  19. Kerim says:

    I didnt quite understand this. So I have a honda accord which gets about 20 mpg right now. It is a 1994 built. So if I trade that in and get a newer car with 30 mpg I get 4500 USD from the government?

  20. Poppop says:

    Need to find out how my congressman and senators voted. Can they be so stupid as to have had voted for this bill? Wonderful for someone who has the money to buy a new car but how about the poor jerk driving an old junker and can barely scrape enough together to buy a gallon of gas? We are expected to do anything and everything to save our “Green Earth” for the children. Who’s children? The Chinese.

  21. Jason says:

    Am I the only one who jumped for joy when this passed? As a recent college graduate driving a 1996 Ford Explorer with 235,000 miles, yes it’s paid for, but I spend 200 a month on gas. Now I will be able to get 4500 off a brand new honda civic coupe. The program plus dealership incentives plus 0% financing, plus 2k that I saved up, I will be able to buy one of the most affordable and reliable cars that will last be a very long time for under 10K!!!!!!!!! Amazing deal!!!! How can I afford not to take advantage of this? I think those driving newer cars worth more than 4500 should just be lucky they’re not in my position. My car could go any minute, is terrible on gas and id lose my job without my car. Not every program will help everyone, but this one IS going to help me and instead of anyone complaining about it, please just go to work so your tax dollars can get me my new Honda Civic!!!! :-)

    • BUY AMERICAN says:

      ARE U STUPID?? HAVE U NOT LEARNED ANYTHING FROM WHATS GOING ON TODAY IN THE UNITED STATES… ESPECIALLY DETROIT! MAYBE YOU SHOULD BE BUYING AN AMERICAN CAR! AND HELPING THE AMERICAN AUTO INDUSTRY!!!!!

      • Jason says:

        You’re right, If I want a small coupe good on gas, I should go for a Cobalt? HAHA yeah right!!! I’ll take my civic, thanks for your concern though. My money, my choice. You wanna foot the bill I’ll take any car you want. I want affordable and reliable and hondas fit that bill more than any other car, especially with the 4500 discount tax payers are providing. :-)

    • Wizard Prang says:

      Probably. My car is a seventeen-year-old Saturn with over 250k on the clock; but I have no interest in buying a new vehicle, which is what this bill is all about.

      Good luck with the car payment though.

      • Jason says:

        Well, after your car bites the dust after the cash for clunkers program ends, enjoy your higher car payment. I’ll have a new honda for cheaper than you can get a busted up saturn. So how’s the future looking for Saturn? The fact you tried to 1-up me on my car being old and high miles, damn big of you!

        • Wizard Prang says:

          Jason,

          You missed my point. I was not trying to “one-up” you, nor was I trying to say that Saturn was a superior brand. The point that I was trying to make was that running out and buying a brand new car with money you don’t have is not necessarily the best solution.

          New car values drop “like a rock” (no pun intended). Even if the dealership doesn’t help themselves to the lion’s share of your $4500 you will still be “upside-down” – owe more on it that it’s worth – about five seconds after you drive it off the Dealer’s premises. This is why I do not buy new vehicles. Did it once, never again.

          Not that it matters, but the last time I looked, Penske was acquiring Saturn… so they may actually _have_ a future, after all.

          I do not believe that this measure was designed to help the buyers, I believe that it is yet another bailout for the Auto Industry. But that’s just my opinion.

          Oh, and there will be no car payment, higher or otherwise – I already have the money saved up to replace my vehicle (with a decent used one) when it dies. Yes, I know that’s quaint and old fashioned, but I’m funny that way.

          Good luck, whatever you decide to do.

  22. Jordan says:

    I don’t qualify because my car already gets good gas mileage. But my dad swears by the car buying process here:
    http://excarsalesman.typepad.com

    I have a feeling dealers are going to automatically increase prices because of the increased demand (artificial) for great MPG cars. So the thousands of savings from this bill for consumers is not entirely accurate.

    With the price increase, I’m certain some markets you’ll come out even as if they never offered this voucher. It is poorly written legislation.

    • Jason says:

      “With the price increase, I’m certain some markets you’ll come out even as if they never offered this voucher. It is poorly written legislation.”

      So your saying some cars are going to increase in price 4500. OK… delusional…

      Disregard your “feelings”…
      Your post was poorly thought out. I’m sick of people complaining about this. The 4500 is on top of all the other incentives and deals dealerships offer. This legislation is perfect for my about to bite the dust, not worth anything car.

  23. Maggie says:

    Is it a tax credit program? I thought the amount ($3500 or $4500) was reduced from the price of the new car. I just ordered a new car yesterday, but we haven’t completed the paperwork.

  24. Damon Day says:

    Hey Jim,

    Did you happen to catch how long this program is supposed to last? I have a 96 chevy truck with a 454 that has been sitting for about 2 years. Just haven’t taken the time to list it on Gregs list yet. I figure I might be able to get $3000 for it. But now I am thinking it might be better just to trade it in.

    My wife’s lease is up on her tahoe next june. If this program lasts that long it may make more sense to just hold onto the truck, turn in the tahoe and then have the old truck to trade in and buy a new one.

    Also I didn’t see whether or not this is straight cash back from your taxes or a deductible on your taxes.

    • jason says:

      Lasts till November, rumors it will go longer if successful. Well you better of have that truck insured for the past year to take advantage of this. It’s the same as a trade in, you’d get a reduced price for the new car as you would for any trade in.

      • Damon Day says:

        Thanks Jason, ya it has been insured. It is just sitting there because I actually really like the truck and have a hard time getting rid of things. So it is actually an instant reduction in the purchase price of the new car and not a tax credit that you get later? That is even better.

  25. jason says:

    Yes, I can’t wait since the most anyone ever offered to buy my car is 600. :-) Keep checking cars.gov for updates.


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