In a state as big as Texas, driving isn’t a convenience — it’s a way of life. The average Texas motorist logs more than 16,000 miles behind the wheel each year, far more than the average American. Nationally, nearly 1 in 10 new vehicle registrations occurs in the Lone Star State.
The central role cars play in Texas means that policies that impact the automobile industry affect us more than most. The tax reform package being considered by Congress has many benefits — but a major wrinkle in the Senate version could force some dealerships in Texas to shutter. That would devastate Texas motorists and jeopardize more than 200,000 jobs.
Earlier this month, the U.S. House passed the Tax Cuts and Jobs Act, a comprehensive reform of the nation’s tax code. The bill kept in place a rule that allows local dealerships to deduct the “floor plan interest expense” they pay on the loans they rely on to purchase cars.
Now the Senate is considering its tax plan, which removes much of the deduction dealerships now have. That threatens to financially endanger many of us.
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These “floor-plan loans” are what enable car dealerships to fill their lots. At Southwest Ford, the dealership I run in Weatherford, we have more than 750 automobiles on the lot. That’s about $40 million in inventory.
Running the numbers for my own dealership paints a bleak picture. Right now, we pay an interest rate of 5.75 percent on our floor-plan loans to service our $40 million inventory. That’s $2.3 million each year in interest payments. Fortunately, we can deduct those payments off our taxable income right now. But if the Senate bill becomes law, we’ll be able to deduct only 30 percent of that interest. This would boost our taxable “income” by over $1.6 million, increasing our tax bill by a whopping $650,000. And that would crush our business.
Borrowing so much capital is risky for any business. But it’s an especially large expense for car dealerships, as most are small operations. In Texas, most dealerships employ around 50 people. And because of price competition among same-brand dealerships, the profit margins on new cars are razor thin.
We take this risk because our customers expect us to. Most would never buy a car without comparing various models, considering different upgrades, and taking a few test drives. Indeed, according to a recent Autotrader survey, more than 8 in 10 car buyers are “highly satisfied” with their test-driving experience.
If dealerships couldn’t deduct the interest expense they pay on floor-plan loans from their taxable income, few could afford to keep any cars in stock — let alone stay in business. Those dealerships that could make ends meet would be forced to raise prices.
Lawmakers in the House understood all of this, which is why they took special care to preserve the floor-plan financing deduction in their reform bill. Unfortunately, the Senate hasn’t followed the House’s lead.
Ending this deduction wouldn’t just hurt car dealers and those in the market for new cars — it could jeopardize jobs and devastate the retail sector. In Texas, new car dealerships support 220,000 jobs that pay out $6.8 billion in salary and wages each year. And cars account for 20 percent of retail sales. A wave of dealership closings would put all of this at risk.
Preserving the floor-plan loan deduction is critical. Any tax reform that eliminates this policy will hurt Texas motorists, shutter small businesses and their employees, and harm the local economy.
Charles W. Gilchrist is president of Southwest Ford in Weatherford. He’s on the board of directors of the National Automobile Dealers Association.