Stimulus offers modest auto savings

Will the deduction help?

However, the analysts do not believe the new deduction will cause a surge in car sales. They predict the tax incentive will increase light vehicle sales by 94,000 units this year.

For some perspective, consider that the number of light vehicles sold in the U.S. for the month of January this year was 656,976, according to Auto Data's Motor Intelligence Web site.

The previous version of the bill passed in the Senate -- but not included in the House of Representatives bill -- would have expanded the tax deduction to include the interest paid on a car loan in 2009.

The original auto ownership tax assistance amendment would have cost taxpayers $11.5 billion, but would have provided a much larger tax deduction to car buyers. The version that passed will cost about $2 billion.

Eliminating the deduction for loan interest dramatically reduces the amount of money car buyers can save, says Chas Roy-Chowdhury, head of taxation for the Association of Chartered Certified Accountants.

"Compared to tax savings of $1,500 or $2,500, it's just a drop in the bucket," he says. "I don't know if they really thought through leaving it in there, because it's going to be very minimal and yet it's going to cost $2 billion."

Stephen Spivey, senior automotive and transportation industry analyst with the research and consulting firm Frost and Sullivan, also questions whether the tax incentive will be enough to drive sales higher.

Spivey believes tight credit conditions and pervasive fears over the state of the economy may continue to keep buyers on the sidelines.

"Manufacturers are spending thousands on incentives for each car that they sell and states are going to lose money with this deduction that is not going to drive dealer traffic in a substantive way," he says.

However, not everyone is pessimistic about the new tax break. Peter Kitzmiller, president of the Maryland Automobile Dealers Association, is hopeful the sales tax deduction will be enough to get people in showrooms.

"I think the ability to deduct the sales tax up front is going to be a good incentive for people to take a look at buying a new car," he says. "Depending on what kind of car you buy and the tax rate in your state, it can be a pretty significant deduction."

Kitmiller hopes the new deduction will provide just enough incentive to bring wavering shoppers off the fence and into the showroom.

"There are unbelievable discounts and rebates right now, but we've just had a hard time getting people to come into the show room," he says. "So hopefully this nudge will get them to come in."

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