Former President Donald Trump has proposed a number of potential tax breaks to be enacted if voters give him a win in November. This week, he added a protectionist wrinkle to one of his proposals for his second term—which would be difficult to abide by, because of policies he enacted during his first term.
As Reason reported earlier this month, Trump told the Detroit Economic Club that if elected in November, "we will make interest on car loans fully [tax] deductible."
"When we do all of this, you will witness nothing less than the launch of a new American industrial revolution," he added. "By the end of my term, the entire world will be talking about the Michigan miracle and the stunning rebirth of Detroit."
This week, Trump added another wrinkle to the plan. "I just made a decision to do it a little bit differently, because I'm only gonna do it if they build that particular product—namely, an automobile—in the United States," he told a crowd in North Carolina on Tuesday.
"Deductibility of interest is great, but only if the car is manufactured in the United States," he added, according to Bloomberg. "Why the hell would we give them taxes if they manufacture the car in China, Japan or lots of other places that stole our business over the years?"
But Trump's plan was already economically illiterate, and this tweak only makes that worse. Deducting auto loan interest would require itemizing one's deductions, and 90 percent of taxpayers just take the standard deduction. For tax year 2024, the standard deduction is $29,200 for married couples and $14,600 for individuals; anyone hoping to deduct auto loan interest would need to have more than that amount in other eligible expenses, like mortgage interest or real estate taxes. (Congress could also carve out an exception that could be deducted in addition to the standard deduction, a category that currently includes alimony and student loan payments.)
By further limiting the deduction only to American-made cars, Trump is narrowing the number of people who could even qualify, especially since the trade policies he enacted during his first term have already made it more difficult to build cars in America in the first place.
Trump won the presidency in 2016 promising to kill existing trade deals, chiefly the 1994 North American Free Trade Agreement (NAFTA), and replace them with something better. In the end, the United States–Mexico–Canada Agreement (USMCA) was that replacement, which he signed into law in 2020.
The USMCA was largely just a rehash of NAFTA, but one area in which it differed was in its treatment of automakers. One of NAFTA's achievements was removing trade barriers, like tariffs, between North American countries. "U.S. automotive firms now receive an average 18% tariff preference over export competitors to Mexico, and as high as 30% on certain automotive products," according to a June 2004 Department of Commerce report. "From 1992 to 2002, U.S. motor vehicles and parts firms increased exports to Canada by 87% and increased exports to Mexico by 126%," at which point "U.S. firms captured 67% of Mexico's total automotive import market and 77% of Canada's total automotive import market."
To qualify, automakers needed to meet rules of origin (ROO) requirements, proving that a minimum of both the vehicle's assembly and the sourcing of its components took place in North America. But the USMCA included much stricter ROO requirements, raising the minimum for passenger vehicles to 75 percent from NAFTA's 62.5 percent; for auto parts, it raised the acceptable minimum from 60 percent to 65 percent. It also created new requirements that NAFTA had not included, requiring that 70 percent of a vehicle's steel and aluminum originate in North America and that at least 40 percent of its "production by value be made by workers earning at least $16 per hour."
"USMCA's requirements are estimated to increase U.S. production of automotive parts and employment in the sector, but also to lead to a small increase in the prices and small decrease in the consumption of vehicles in the United States," according to a 2019 report by the U.S. International Trade Commission (ITC). The report estimated that "prices for all vehicles would undergo a modest increase (ranging from 0.37 percent for pickup trucks to 1.61 percent for small cars), and that total consumption in the United States would decline by over 140,000 vehicles."
The USMCA allowed automakers to either build their products in the U.S. or pay a tariff of 2.5 percent, which is then passed on to the consumer. "That allows manufacturers to calculate whether their compliance costs would exceed 2.5% of the value of the vehicle," William Alan Reinsch of the Center for Strategic and International Studies testified before the ITC in November 2022. "If they do, companies may simply decide to pay the tariff rather than proceed with the relatively arduous process of meeting ROO requirements."
Evidence indicates that that's exactly what has happened. "The percentage of vehicles imported from Canada or Mexico for which duties were paid increased from 0.5 percent (a total value of $517 million) in 2019 to 8.2 percent (a total value of $8.9 billion) in 2023," according to a July 2024 report by the Office of the U.S. Trade Representative, an agency within the executive branch. And despite Trump's insistence that foreign governments pay tariffs, those costs are in fact borne by companies, which pass them on to the consumer.
If Trump wanted to make cars more affordable, he could start by repealing his own trade policies. But instead, he has pledged to double down, slapping tariffs on nearly every single item imported to the U.S. If he truly wanted to alleviate America's tax burdens, there are numerous ways to do so broadly and effectively. But by sticking to his protectionist trade policies, and merely singling out penny-ante deductions that very few people can qualify for, he is signaling that he has less interest in bringing down prices, or making the tax code more fair and efficient, than simply buying votes.
The post Trump Floats Tax Break for Carmakers Hurt by His Own Trade Deal appeared first on Reason.com.
