Tax for Clunkers

26 Aug, 2009 by Warner Todd Huston

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Yep, you read that right. In many states car buyers that turned in their “clunkers” for up to $4,500 off the cost of a new car are finding out that they have to pay state sales tax on the $4,500 too. And still others just might find out next year that they’ll have to pay income tax on that “free” government money.

Many South Dakotans, for instance, have been shocked to find that the wonderful gift from Obama was still added in with the cost of the automobile for the sales tax calculation, so their tax went up accordingly despite that they didn’t pay the $4,500 themselves.

Some states calculate sales tax by subtracting from the total cost of a new purchase the trade-in allowance of a buyer’s old car. But in the case of cash for clunkers, there is no trade-in allowance and the $4,500 remains added to the car purchase.

Even worse, many states will charge income tax on the $4,500 because the sum will be determined to be the same thing as income to the car buyer.

There is also another interesting aspect to this cash for clunkers situation. One can be sure that many buyers did not take the time to negotiate with dealers and paid full sticker price further negating the supposed savings that they were supposed to realize from the cash for clunkers program. As Market Ticker’s Karl Denninger quipped, “Ain’t car dealers grand (several grand out of your pocket, that is!)”

(Cross posted at PubliusForum.com.)