Former President Donald Trump’s latest campaign proposal, a full tax deduction for car loan interest, has ignited debate. While seemingly beneficial to all car owners, a closer look reveals the plan would disproportionately favor wealthier Americans, potentially costing billions in federal revenue. This analysis explores the proposal’s potential impact, its economic implications, and its likelihood of success within the current political climate. It examines the intricacies of itemized deductions and the existing tax code to shed light on who would truly profit from this initiative.
Key Takeaways: Trump’s Car Loan Interest Deduction
- Trump proposes making car loan interest fully tax deductible, a move he equates to the existing mortgage interest deduction.
- Experts estimate the plan would cost roughly $5 billion annually and $61 billion over ten years in lost federal revenue.
- The deduction’s benefits would be largely concentrated among higher-income earners who itemize their taxes, leaving most Americans unaffected.
- The proposal faces an uphill battle in Congress, given its cost and the limited number of taxpayers who would benefit.
- This analysis utilizes data on auto loan debt, tax return statistics, and tax brackets to provide a comprehensive view of the potential impact.
The Proposed Tax Break: A Closer Look
During a recent address, Trump suggested a fully deductible car loan interest payment, explicitly comparing it to the existing mortgage interest deduction. This analogy, however, overlooks a critical difference: while the mortgage interest deduction helps a (relatively) broader swathe of homeowners, Trump’s car loan interest deduction primarily benefits those who itemize their taxes.
Who Holds the Auto Loan Debt?
Over 100 million Americans held auto loans in Q2 2024, totaling $1.63 trillion, according to the Federal Reserve Bank of New York. Experian data reveals an average car loan of roughly $24,000 in 2023. The average annual interest payment on a new vehicle hovers around $1,332, according to AAA. This implies a vast pool of potential beneficiaries, but the reality is far more nuanced.
Economic Impact and Distributional Effects
The Tax Foundation estimates the proposed deduction would reduce federal income tax revenue by approximately $5 billion annually, reaching $61 billion over a decade. This substantial cost raises concerns about its fiscal viability. However, the financial advantages aren’t evenly distributed.
Itemized Deductions: A Key Limitation
To benefit from the deduction, taxpayers must itemize their deductions. But this condition significantly restricts access, as approximately 90% of taxpayers claim the standard deduction instead. For itemizing to be worthwhile, a taxpayer’s total itemized deductions need to surpass the standard deduction amount ($14,600 for single filers, and $29,200 for married couples filing jointly in 2024). According to IRS data, only around 9% of tax returns claimed itemized deductions in 2021.
Who Benefits Most? The Wealthy
Financial analysts like Jaret Seiberg of TD Cowen Washington Research Group predict that the proposal would primarily benefit wealthier individuals buying more expensive vehicles, due to the necessity of itemizing. Entry-level car buyers, often with more modest incomes, will likely remain ineligible as they use the standard deduction. Further analysis of IRS data shows that 62% of those itemizing in 2021 had an adjusted gross income (AGI) of $100,000 or more, and they claimed 77% of itemized deductions. This strongly suggests that the bulk of the benefit would flow towards the upper income brackets. This uneven distribution raises equity concerns about such a measure.
Precedents and the Current Tax Landscape
While there’s precedent for deductibility of personal interest (pre-1986), Congress eliminated this broad category as part of tax reform. Currently, only a limited set of interest expenses are deductible including home mortgage interest, student loan interest, and business interest. The proposal to once again allow car loan interest to be deductible creates an exception that would require significant legislative change. Further, the 2017 tax law, signed by President Trump himself, further decreased the number of taxpayers itemizing by increasing the standard deduction.
Political Feasibility
The proposition’s chances of legislative approval appear slim. The substantial financial implications and limited benefit to a specific demographic are likely to create resistance among both Democrats and Republicans in Congress. Given these factors, analysts predict little likelihood of the proposal being enacted into law. Even if the proposal were accepted, details on implementation remain absent.
“This percentage might go up a bit if auto loan interest were deductible, but it’d still be true that the vast majority of households would not be able to benefit, and the ones that did would be disproportionately high-income filers,” explains Leonard Burman of the Urban-Brookings Tax Policy Center, highlighting the inherent limitations and unequal impact of this proposition.
