As President Trump and his Republican allies struggle to address affordability concerns, they have touted the huge tax cut bill that took effect this summer.
Mr. Trump and his advisers have promised Americans that they will receive larger tax refunds next year, in part because of the new tax breaks included in the bill. One of them — a deduction the law calls “no tax on auto loan interest” — is likely to be popular. However, it may only bring marginal savings to consumers.
The deduction has its origins in a campaign promise Mr. Trump made in October 2024 to boost the domestic auto industry and make cars more affordable. Mr. Trump's domestic policy bill, which he signed in July, includes the withdrawal. But tax and auto experts aren't sure whether the policy will be a boon for the auto industry or lead to greater affordability.
The withdrawal is part of a broader policy push by the Trump administration to roll back electric vehicle subsidies and reorient the auto industry to ensure more cars are built in the United States. With the stroke of the pen that created the tax deduction for auto loan interest, Mr. Trump also eliminated subsidies for electric vehicles, a policy policy under President Joseph R. Biden Jr.
Sen. Bernie Moreno, an Ohio Republican and one of the tax deduction's main architects, called the policy an “immediate relief” from high car prices, which he blamed on Mr. Biden's electric vehicle subsidies, among other Democratic measures.
“People are financing cars today, they financed cars yesterday and they're going to finance cars tomorrow, and the ability to write off that interest is a big deal,” he said.
But the withdrawal comes at a time when the auto industry is struggling to adjust to Mr. Trump's tariffs, which analysts expect will ultimately raise auto prices. Therefore, the deduction may provide only marginal relief to consumers.
“To the extent that these tariffs actually go into effect and increase the price of cars, that will wipe out any benefits you get from this deduction,” said Adam N. Michel, director of tax policy at the Cato Institute, a libertarian-leaning think tank.
According to industry analyses, the tax break is expected to save taxpayers several hundred dollars annually. Individuals whose adjusted annual income is no more than $100,000 – $200,000 for co-applicants – can deduct the interest on an auto loan for a new car with final assembly in the United States. The benefit, which can be claimed in addition to the regular tax deduction, only applies between 2025 and 2028. And because it is a deduction and not a refundable tax credit, anyone who wants to claim the tax break must have taxable income.
“While any savings will benefit consumers, this amount is unlikely to be a major incentive for new car buyers, nor will it lead to an increase in vehicle production in the U.S.,” Jonathan Smoke, senior economist at Cox Automotive, said in a statement.
Still, of all of Mr. Trump's populist tax changes — such as no taxes on tips and overtime — the car loan interest deduction may be the most widespread. And upper-middle class Americans will benefit the most.
“It provides a benefit to over 100 million people, many of whom will buy a car at some point in the next five years,” said Patrick L. Anderson, managing director of Anderson Economic Group, an automotive consulting firm.
But lower-income households, who mostly buy used cars, won't see any benefit, said Sarah Austin, senior analyst at the Institute on Taxation and Economic Policy, a left-leaning think tank.
“If you want to say this is about affordability and improving the affordability of cars,” she said, “then it's really difficult to feel like you've done a good job when most of the market is excluded from that deduction and can't actually take advantage of it.”
Mr. Moreno, who worked in the automobile trade for nearly 40 years before becoming a senator, defended the decision to exclude used cars, claiming that it was safer and more environmentally friendly to replace America's aging commercial vehicle fleet with new cars.
However, Mr Moreno regrets that the directive excludes anyone who wants to lease a car.
“We actually only relieved the 50 percent that are funded,” he said. “We haven’t given any relief for the 50 per cent of the lease, so that’s what we need to do next.”
As with any tax deduction, if they are not smart when filing their taxes, those who are entitled to it may not benefit.
Richard Pon, an accountant in San Francisco, predicts that some people may not know where their car's final assembly takes place or how much interest they paid. “People are going to miss it, so people need to keep an eye out for it,” he said.
One surprise Mr. Pon noticed in the draft tax form is that people who use their personal vehicle for business, such as someone who drives for Uber on the weekend, are still eligible, even though the IRS states on its website that the policy applies to “a vehicle for personal use (not for business or commercial use).”
Some car dealers support the change. Amy Hunter Wright, a spokeswoman for the National Automobile Dealers Association, said the savings from this deduction would make cars more affordable, which she called a “good thing from a dealer perspective.”
Tax experts and auditors pointed out that the deduction would increase complexity on the merchant side as sellers would have to make declarations of interest to consumers in subsequent years.
Mr. Michel of the Cato Institute understands why deducting car loan interest is good policy. “You can sell it in a way that benefits domestic, American, heartland automakers and workers, so you can create a lot of sentiment with a regulation like that,” he said.
But he doesn't think it will make a difference when it comes to Trump's goals on affordability and the domestic auto industry. “I don't think the implications match the story that's being told,” Mr. Michel said, “but to the extent that politics just tells good stories, I think there are a lot of political reasons for people to get involved in these things.”