Tax threat heightens concern about affordability

Prices for new cars and trucks, being pushed ever higher by fuel economy improvements, safety equipment and advanced technology, could soar out of range for many buyers with the addition of an import tax to the equation.

Among the vehicles hit hardest would be entry-level nameplates that automakers rely on as gateways for new customers but say they can't make profitably in the U.S.

President Donald Trump and House Republicans have floated the idea of taxing vehicles and other goods that enter the nation's borders, while providing more favorable tax treatment to exports. Such a tax would have drastic effects on the auto industry, raising prices not only on Nissan Versas, Ford Fusions and crew-cab Chevrolet Silverados assembled in Mexico, but also on many of the imported components that U.S. plants use.

The tax would ripple through dealerships, which would pay more to carry higher-priced vehicles in inventory. Auto sales would inevitably decline, as some consumers instead visit a pre-owned lot or hold onto their current vehicles longer, and that could lead to job losses both on sales floors and assembly lines.

"We already have an affordability issue with the auto industry," said Cody Lusk, president of the American International Automobile Dealers Association. "We're already pushing it with consumers, with the average payment going up and loan terms being stretched out." 

Toyota Motor Sales U.S.A. has spoken out against a border-adjustment tax and urged its dealers to voice their opposition. General Motors executives last week declined to weigh in on the idea of a tax but said the company is better positioned to deal with it than many competitors. 

"We are supportive of efforts by President Trump and Congress to implement tax reform that improves the competitiveness of American companies," GM CFO Chuck Stevens said on a conference call with analysts. "Our analysis shows the U.S. auto industry on average derives in the mid-50 percent range of its content from non-U.S. sources. Ours is lower. If current proposals are enacted, we expect to be less affected than some others." 

Stevens added that GM would benefit from tax reform because it exports a high number of vehicles from the U.S.

Among major automakers, Ford Motor Co. -- the target Trump has criticized most frequently for its Mexican imports -- would be least affected by a border-adjustment tax, according to a report issued last week by Baum & Associates. A 20 percent tax -- the amount most commonly being discussed -- would force Ford to raise prices by an average of $282 per vehicle, the report said, while GM would need a $995 price hike.

From there, the numbers get much tougher for consumers to swallow: $1,312 for American Honda, $1,672 for Fiat Chrysler Automobiles, $2,298 for Nissan North America and $2,651 for Toyota. Automakers that import their full lineups would, logically, be even more affected, including $5,156 per vehicle for Mazda Motor and $17,204 for Tata Motors' Jaguar and Land Rover brands.

"A massive change like this would obviously be a jolt to the market," said the report's author, Alan Baum.

Many buyers already are stretched to the limit, as dealers increasingly rely on seven-year and sometimes even eight-year loans to help fit monthly payments into customers' budgets.

Median U.S. household income fell 1 percent between 2005 and 2015, the most recent year for which U.S. Census data is available, while the average transaction price for a new vehicle jumped 21 percent over the same period, according to Edmunds. 

"At this point we've been able to tolerate it fairly well," said Lacey Plache, Edmunds' chief economist. Low interest rates, decreasing unemployment and rising consumer confidence have helped U.S. sales reach record highs in both 2015 and 2016. 

"But if any of these factors change, we do start to see a weakening ability to afford higher prices," Plache said. "Any kind of price shock, especially in the range being talked about, would definitely be a huge hit to the industry. That's a significant increase in the price of a car." 

Tack a 20 percent tax onto vehicle prices, and automakers could decide to drop some low-margin product lines. They could shift some production into the U.S., but that's a lengthy and expensive process, and it makes little sense to start doing so at this point based merely on the prospect of a tax. 

"You're not going to build a plant based upon a policy that may or may not come into place -- and even if it does, it may not stay in place," Baum said.

The National Automobile Dealers Association has long railed against what it calls profit-killing regulations, including federal fuel-economy standards that it says will add thousands of dollars to vehicle prices. A border-adjustment tax such as the one being championed by some Republicans in Congress would have a similar, if not harsher, effect.

NADA President Peter Welch warned, in a speech to the Automotive News World Congress in January, that increasing costs could "turn the average car or truck into a luxury good affordable only to America's top wage earners."

"Unless we as an industry, working with policymakers at all levels of government, start looking through the lens of customer affordability, we risk imposing a new luxury tax on the vehicles our members sell, which, in turn, will depress the SAAR, reduce fleet turnover and deprive large swaths of Americans of the opportunity to obtain and benefit from the ownership of a new car or truck," Welch said. "That's a road that we as an industry and as a nation cannot afford to take."

The AIADA, which represents dealers selling foreign nameplates, is gathering dealers for a "fly in" summit in Washington next month to lobby against the proposal. The group hopes that greater awareness about the widespread effects of a tax will prevent it from getting enough support to pass.

"It isn't just on a new-car purchase. Everything having to do with a vehicle is going to go up. And this isn't just a tax on the auto sector -- it's everything that comes across the border," said Lusk, the AIADA president. "We believe that the tax code needs to be reformed, but we don't think it ought to be on the backs of American consumers."