Will tax reform lead to more car sales?

on Feb3

Strong tail winds from federal tax cuts, deregulation and other positive economic trends are expected to help spur consumer spending in 2018, including for cars and trucks, economists and analysts say.

Pickup sales especially could benefit, while luxury-vehicle sales in states with high state taxes, such as New York, New Jersey and California, may be dinged by the tax-code changes.

The consensus forecast for economic growth this year is 2.7 percent, but National Association of Manufacturers Chief Economist Chad Moutray believes the momentum from last year will carry over and boost the economy 3 percent.

Business leaders are bullish about sales and profits, saying individual and corporate tax cuts will produce more disposable income, much of which will be spent on goods and services.

“Ninety-five percent of our members are upbeat about their own company’s outlook, and I attribute a lot of that to tax reform,” as well as a strength in the global economy, Moutray said.

The tax cuts are expected to pump $1.5 trillion into the economy over a decade, but how much will be eaten up by inflation or go into savings remains to be seen.

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Auto dealers aren’t taking a sales bump for granted. “Will it end up in pockets of customers and will that translate into higher car sales? I think the jury is still out on that,” Peter Welch, president of the National Automobile Dealers Association, said last month during the Detroit auto show.

Workers will start to recognize smaller withholdings by the middle of this month, with take-home pay increasing 2 to 4 percent, UBS Investment Bank said in a research note. Collectively, consumers should receive an additional $200 billion or more, it estimated, leading to a 1.5 percent increase in personal consumption expenditures. UBS projected consumer spending would increase about 2.2 percent on new vehicles, and about 1.2 percent for used ones, because of the individual tax cuts.

Moutray: Hire more and invest

“Automakers will likely absorb this demand benefit through improved underlying pricing rather than increased volumes,” it said.

UBS cautioned that tax cuts typically are delivered when economic growth is weak, so there is uncertainty about whether people will spend or save their extra income now, with the economy strong.

Critics of cutting the corporate tax rate to 21 percent said companies would use the savings for dividends, share buybacks and profit-taking, with little trickling down to employees. Early studies have found that, indeed, that is where the bulk of the savings is going. But many companies also have declared plans to raise wages, give bonuses, improve benefits, make capital expenditures and shift some overseas production back to the U.S.

AutoNation Inc., for example, said it would use savings from the new tax plan to bolster its retirement and health benefits for employees at the nation’s largest dealership group. Starbucks Corp. announced wage increases worth $120 million and other perks for 150,000 employees as a direct result of the tax cuts, plus stock grants worth more than $100 million.

FedEx Corp. also is raising compensation for hourly and salaried employees and investing $1.5 billion to expand its hub in Indianapolis over the next seven years.

“We went out and sold manufacturing and tax reform as way to grow the economy,” Moutray told Automotive News. “We want to make sure that manufacturers do what we promised: hire more workers, invest in the business.”

The Federal Reserve has said it will raise interest rates three times this year, which affects consumer spending. But rates will still be historically low, and the reason for the increase is the growing economy, which is positive, Moutray added.


More likely to buy more

A survey found that most consumers have not reconsidered their vehicle purchase plans because of the tax-law changes, but those who had rethought those plans were more inclined to buy or to buy a more expensive vehicle. That was especially true for ultraluxury buyers, although the sample size for them was small.
Have the changes in the tax law made you reconsider your vehicle purchase plans?
  All respondents Ultraluxury brand respondents
No 80% 68%
Respondents who said yes:
In general, I’m more inclined to buy or lease a vehicle 14% 24%
I was already in the market, and now I’m more inclined to go for a more expensive vehicle. 3% 8%
In general, I’m less inclined to buy or lease a vehicle. 1% 0%
I was already in the market, and now I’m more inclined to go for a less expensive vehicle. 2% 0%
Ultraluxury brand respondents are those who had visited dealerships selling Alfa Romeo, Aston Martin, Bentley, Ferrari, Lamborghini or Maserati, and account for 25 responses.
Survey conducted by DealerRater.com Jan. 3-10; 10,542 responses More likely to buy more

Regional issues

Welch said sales could be dampened in high-tax regions such as the Northeast and California because of the law’s $10,000 cap on deductions for state and local taxes. Residents with high property and sales taxes in those states, including high income earners, could take a financial hit and think twice about buying a new car, which could be especially problematic for premium brand dealerships.

Manhattan luxury-car dealer Brian Miller said those he has talked to on the “higher end” of the income spectrum seem to be embracing the reforms. He said his dealership, Manhattan Motorcars, will get a tax break that will pump a lot more money into the economy.

“I think corporations are going to invest, dealerships as well,” said Miller. “So more employees, more marketing, improved facilities.”

Lee Certilman, owner of Nardy Honda Smithtown in St. James, N.Y., on the north shore of Long Island, said the tax reform will not change how he operates. But it will take a toll on the cash available to consumers in his market because of high local property taxes.

“It’s yet to be seen, but it doesn’t seem to me to be a very positive change,” said Certilman. “If cash becomes a little more constrained, it will be up to the manufacturer to offer a little more incentive programs in those areas to entice the consumer a little bit more.”

On the flip side, pickup buyers tend to “live in low-cost tax states,” said Jonathan Smoke, Cox Automotive’s chief economist. “They will be huge beneficiaries of the tax cuts.”

Jamie LaReau contributed to this report.

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