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How the Cash for Clunkers Subsidy Would Work

Posted by Jamie Downey  June 12, 2009 08:04 AM

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On June 9, 2010, the US House of Representatives passed the Sutton Fleet Modernization bill, a.k.a the “cash for clunkers” act. The idea behind the legislation is to get older and less efficient vehicles off the road as well as stimulate automobile sales. This is done in the form of a significant US Government subsidy to the purchaser of a new car or truck. The bill is being endorsed by the automobile manufacturers, the United Auto Workers and the National Automobile Dealers Association. Here is how the legislation would work:

• If you trade in a passenger car that gets 18 miles per gallon or less and buy a new vehicle with an improvement in fuel efficiency of 4 or more miles per gallon, the US government will provide $3,500 toward that new vehicle. The subsidy from the US government increases to $4,500 if you buy a vehicle with an improvement in fuel efficiency of 10 or more miles per gallon.

• If you trade in a sport utility vehicle that gets 16 miles per gallon or less and buy a new vehicle with an improvement of fuel efficiency of 2 or more miles per gallon, the US government will provide $3,500 toward that new vehicle. The subsidy from the US government increases to $4,500 if you buy an SUV with an improvement in fuel efficiency of 5 or more miles per gallon.

A slight hitch is included in the bill, the vehicle that you trade in must go to the scrap yard. So you will get no cash for the vehicle you trade-in. This will effectively reduce the value of the subsidy for most people as the vehicle they trade in likely has some value.

This is all good news to the automobile manufacturers, suppliers and dealers. The bill is estimated to cost the American tax payers some $4 billion and is now off to the Senate for action.

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D. Abraham Ringer is a CERTIFIED FINANCIAL PLANNER practitioner and a Financial Adviser with Morgan Stanley Global Wealth Management in Boston. He is registered in MA, NH, NY and several other states to which his articles are directed. For more information please visit www.morganstanleyfa.com/ringer
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