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Impact of Cash for Clunkers Program

The Cash for Clunkers Program Ended at 8PM EDT on Monday August 24.  According to government statistics, 680,114 Cash for Clunkers deals were made using $2.88 billion of the $3 billion authorized for the program..  The average clunker received a $4,235 rebate.  Reimbursements are coming very slowly to dealerships and the government is putting more processors on staff to handle the backlog.  Overall, a rare successful stimulus program.

On July 24, 2009 new car dealers in the United States began accepting trade-ins of older vehicles not worth much for new cars. Based on their fuel economy and the fuel economy of the new vehicle purchased, customers received a voucher for $3,500 or $4,500 to apply to the purchase of a new car or light truck.

Ultimately, the results of this program may be the sale of slightly over 700,000 new cars and light trucks with about 250,000 incremental to what would otherwise have been sold. But the impact goes deeper. There will have been substantial sales tax revenue from each sale going to states and cities that sorely need the income. Additional income taxes will be generated from the additional commissions and salaries dealership personnel otherwise would not have earned. The list goes on.

A brief synopsis of the impact of the Car Allowance Rebate System (CARS) is shown below the fold…

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Car Allowance Rebate System – Cars4Clunkers

    OBJECTIVE: Economic Stimulus and Environmental Improvement
    o Prime the pump to get auto industry moving again
    o Reduce emissions by forcing new more fuel efficient vehicles

    Congress funded $1 billion beginning on July 1, 2009
    o Program initially planned to continue through November 1, 2009
    o Actual program began on July 24, 2009
    o Funds were increased by another $2 billion on August 16, 2009

    Consumers can trade in vehicles less than 25 years old for $3,500 or $4,500 rebate
    o Contrary to some reports, this amount is not taxable to the purchaser
    o 25-year limit is to save potentially collectible vehicles from destruction

       o Cars must achieve 22mpg. +4mpg = $3,500; +10mpg = $4,500
    o LDT must achieve 18mpg. +2mpg = $3,500; +5mpg = $4,500
    o HDT must achieve 15mpg. +1mpg = $3,500; +5mpg = $4,500

    Vehicle must have been registered and insured continuously

      o  For 12 months prior to trade in.

    Vehicle traded in must be scrapped within 10 days of trade-in
    o Engine and transmission must be rendered unusable

    1st billion essentially committed in first week of program.

    As of Tuesday, August 18, 411,624 claims had been made by dealers totaling $1.72 billion
    o ~$4,250 per vehicle

    o Many dealers exhausted inventories of fuel efficient vehicles

    • tracking purchase intent fell 15% from peak after 1st week of program and 31% in second week.
    o Indicates people really wanting to utilize program came in early
    o Interest is waning?

    • It appears the program will continue until September 1

    o Ultimately could cover slightly over 700,000 vehicles
    • Generates substantial sales tax revenue for the states, cities
    • Broadly helps the economy through salaries, commissions of dealership personnel and other workers
    • Generates additional income taxes
    o Some proportion delayed purchases waiting for CARS to begin
    o Some proportion were sales pulled ahead from later months that would have been made anyway
    o Incremental sales 250,000 units or +2.5%
    • Other incremental sales peripheral to C4C…
    • Customer’s car won’t qualify… may buy a new car anyway and take the trade-in
    • Customer’s car worth near what the rebate is… dealer takes the car on trade, refurbishes it and sells it. Not under C4C Program
    o “Steady State Sales” = 15,000,000 units
    • 2009 Sales Forecast = 10.15 million
    • 2010 Sales Forecast 11.47 million

    o Government not prepared for early volume of claims
    • Adding processors to more quickly process claims
    • DOT adding up to 1,000 additional processors
    o Some proportion of early claims were prepared incorrectly by dealerships and have been rejected
    • They need to be resubmitted
    o High volume dealers with many claims incurring high receivables
    • Payment is coming slowly for many dealerships
    • Smaller less capitalized dealers stretched by level of receivables and long time it takes to get repaid.
    o NADA has requested that the CARS program cease immediately

    o Maybe functioning clunkers could have been put to better use – transportation for the poor, etc.
    o Short term increase in scrappage business
    • Still not up to level of 15-million unit year
    • However, high price engines and transmissions rendered unusable – cannot be refurbished and sold
    o Impact on auto parts and repair shop business
    • May reduce parts sales that would have gone to keep clunkers on the road

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