MW Trump touts a tax break for car loans - but tariffs will drown any real relief for buyers

By Victor Reklaitis

Another analyst says Washington 'should lower taxes across the board rather than creating specific carve-outs for specific industries'

While President Donald Trump and his fellow Republicans have celebrated a provision in their megabill that delivers a tax break for many Americans with car loans, its modest benefit looks set to get blotted out by Trump's tariffs on the auto sector.

The provision in the GOP's One Big Beautiful Bill Act aims to make auto-loan interest tax deductible for 2025 through 2028 for vehicles with final assembly in the U.S. The deduction is limited to $10,000 per year and starts phasing out for income levels above $100,000 a year, or $200,000 a year for couples.

In a social-media post last week, Trump touted the "Tax Deductions when you purchase an American Made Vehicle." Meanwhile, GOP Rep. Bill Huizenga of Michigan stressed that his party's bill "makes auto loan interest on a new vehicle tax deductible, a provision that I championed to increase Michigan manufacturing and make buying a new car more affordable."

Other Republicans have emphasized that they're delivering on a promise that Trump made during the 2024 White House race. Trump pledged to make interest on car loans tax deductible in an October speech in Michigan, a key swing state.

Auto analysts at J.P. Morgan haven't sounded as impressed by the provision focused on car loans, saying it could provide "modest affordability relief." The policy change "could lead to $20 of new vehicle monthly payment relief per our calculations," and that's "not enough to offset the estimated $65-$90 of monthly payment inflation that is likely to occur due to the 25% tariffs," they said.

Overall, the bank's team expects monthly payments for new cars could rise about 6% to 9% on average versus their levels in last year's fourth quarter. In addition, the analysts said they believe the tax savings related to auto-loan interest likely will have to be provided at the point of sale, given the complexities around determining how American-made any vehicle is. Their analysis was first released two months ago and remains their latest on the matter, a J.P. Morgan spokeswoman told MarketWatch.

Tariffs of 25% have been in effect for imported cars since early April, and tariffs of 25% have been in effect for many imported auto parts since early May. Detroit's Big Three automakers - Ford $(F)$, General Motors $(GM)$ and Chrysler parent Stellantis $(STLA)$ - have either withdrawn their guidance to investors for the year or taken an axe to it.

Analysts at the conservative-leaning Tax Foundation also have expressed some skepticism over the megabill's provision aimed at car loans.

"This preferential treatment doesn't make a lot of sense to me," said Alex Muresianu, a senior policy analyst at the Tax Foundation. "If you're concerned about the economy broadly, you should lower taxes across the board rather than creating specific carve-outs for specific industries."

When asked about the provision's appeal to voters in the battleground state of Michigan, Muresianu continued to sound wary.

"Going too far into political considerations when doing tax policy is often kind of a fool's errand," he told MarketWatch. "That was a big part of the thought process behind the Inflation Reduction Act."

Democrats "wanted to sculpt where the investment would end up and hoped it would end up in Republican or swing-state areas in order to improve their electoral performance," Muresianu said. "At least based on the 2024 election, it doesn't seem like it did."

U.S. taxpayers once were able to deduct the interest expense of their auto loans, but it has been nearly four decades since it was possible. The Tax Reform Act of 1986 ended the tax break.

Around 85% of all new-car purchases in the U.S. are financed with loans, and for used cars the share is about 53%, according to data from the U.S. Public Interest Research Group, an advocacy organization.

The provision in the GOP's megabill doesn't allow for a tax deduction for all of a driver's spending on monthly loan payments, but rather just the parts of the payments that have covered the interest on the loan.

The big tax-and-spending bill now awaits action in the Senate after it passed in the House of Representatives last week. The action in Washington comes amid signs that car ownership is increasingly unaffordable. Fitch Ratings in March reported that the number of subprime auto borrowers who were at least 60 days past due on their loans rose to 6.6% - the highest level on record for Fitch, which began tracking such data in 1994.

Related: People could barely afford their cars even before Trump's auto tariffs. It's about to get worse.

Also: House plan calls for annual fees of $250 for EVs, $100 for hybrids, while ending $7,500 EV tax credit

-Victor Reklaitis

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May 27, 2025 16:13 ET (20:13 GMT)

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