Donald Trump is now pitching a new tax cut that, on the face of it, would seem to benefit almost every American who owns a car.
The former president on Thursday proposed making interest on auto loans tax-deductible, an idea that is similar to the mortgage interest deduction, which allows some homeowners to reduce their taxable income by the amount of money they pay in mortgage interest each year.
Since it was introduced more than a century ago, the mortgage interest deduction has helped boost homeownership in the U.S. by making real estate purchases more affordable to families — a theme that Trump echoed in his proposal to extend the idea to car purchases. Americans owe about $1.63 trillion in auto loans, making it the second-largest category of debt after home loans, according to Federal Reserve data.
“We’re going to make it fully deductible, the interest payments, that’s going to revolutionize your industry,” Trump said Thursday during a nearly two-hour speech at the Detroit Economic Club. “This will stimulate massive domestic auto production and make car ownership dramatically more affordable for millions and millions of working American families.”
While Trump didn’t disclose details about how the plan would be implemented, tax experts say it would likely provide the most benefits to wealthy Americans while offering little aid to those who need it most — low-income workers.
If the plan mirrored the mortgage interest deduction, car owners would need to itemize their borrowing costs — making it a tax benefit that would mainly help high-income Americans, tax experts said. Ironically, that’s due to Trump’s Tax Cuts & Jobs Act, which greatly expanded the standard deduction starting in 2018, which in turn limited write-offs for millions of low- and middle-income Americans.
Currently, only about 1 in 10 taxpayers itemize, the majority of whom are high-income earners. For instance, more than 60% of people earning over $500,000 itemize, versus 4% of those earning between $30,000 to $50,000, according to the Tax Policy Center.
“If he thought there was a reason to subsidize car loan interest payments, this wouldn’t be the way to help people who need help paying for their car loans,” Leonard Burman, an economist at Urban-Brookings Tax Policy Center, told CBS MoneyWatch. “The people you would want to help are low-income people who need a car to get to a job, and this policy wouldn’t help them at all.”
The Trump campaign didn’t immediately respond to a request for comment.
Higher income, higher benefits
Even if the deduction was above-the-line, or a deduction that reduced a taxpayer’s gross income and didn’t need to be itemized — such as retirement contributions or health savings account deductions — it would still help higher-income Americans more than low-income workers, noted Erica York, senior economist at the Tax Foundation.
“In that case, anyone with auto loan interest could deduct that when they are filing their tax return,” York told CBS MoneyWatch. “The benefit the taxpayer would see depends on what marginal rate they pay on their income.”
For instance, someone in the 10% marginal tax bracket would receive a 10-cent deduction for every $1 in income, while those in the top 37% bracket would get 37 cents deducted on every dollar.
“The higher the tax rate, the higher the benefit,” she noted.
Billions in costs
An auto interest deduction would also come at a large cost to the federal government, likely to the tune of billions each year, tax experts told CBS MoneyWatch. Burman said his back-of-the envelope calculation, based on current interest rates and the size of the auto loan market, is “almost $6 billion per year in income tax reductions.”
At the same time, Trump has proposed multiple other tax reductions in recent weeks, ranging from getting rid of taxes on tipped income to erasing income taxes on Social Security benefits. The cost of footing the bill for all those proposals could cost as much as $9 trillion over the next decade, according to a September 20 analysis from TD Cowen analyst Jaret Seiberg.
Already, the U.S. deficit is projected to hit $1.9 trillion in fiscal year 2024. Trump’s proposals could increase the deficit by $6.9 trillion over the next decade, the Penn Wharton Budget Model told CBS MoneyWatch last month. Proposals from Vice President Kamala Harris, Trump’s rival in the November election, would also add to the deficit, but at a smaller $1.2 trillion over the next decade, according to Penn Wharton.
“We are running enormous public debt, and there is no public policy rationale for exempting car loan interest payments from tax,” Burman noted.
