Dueling 'Clunker Car' Bills

Congress is halfway home on passing a bill President Barack Obama asked for more than two months ago to give consumers thousands of dollars to trade in an old inefficient car, sport-utility vehicle, or truck for a less gas-thirsty one. The hang-up is between two versions in the Senate. One would require consumers to make more of a leap in fuel efficiency. Another Senate bill, similar to the one passed by the House last week, is less concerned with providing "green" incentives than clearing dealer lots of SUVs and pickups and giving a helping hand to Detroit automakers.

A vote on one of the Senate bills is expected next week, so that President Obama can sign final legislation before the end of the month. But much still needs to be worked out between the Senate versions. All of the bills cover cars and trucks that were built after 1984. However, the House bill only covers new-car purchases; one of the Senate bills would cover some used cars, to put the program within reach of low-income families. The House bill would require that a "clunker" be owned for at least a year by the person who's trading it in, to prevent people from buying truly junk cars and using them for trades. A provision to allow vouchers to be used for mass transit, rather than buying a car, is not included but is still being debated among some senators.

The House version of the clunker bill gives a $3,500 voucher to people who trade cars that get mileage worse than 18 mpg for one that gets at least 22 mpg. If someone trades in an old pickup truck or SUV for one that gets just 2 mpg more, they too get $3,500. Trading an old pickup or SUV that gets less than 18 mpg for a new vehicle that gets 5 mpg more boosts the voucher to $4,500. A Senate bill sponsored by Debbie Stabenow (D-Mich.) is close to the House bill.

The Senate version that is aimed more at putting a dent in greenhouse gases and reliance on foreign oil is sponsored by Diane Feinstein (D-Calif.) and Charles Schumer (D-N.Y.). It calls for consumers to get the credits if they trade in passenger cars, SUVs, and pickups that get less than 17 mpg for vehicles that get at least 24 mpg. There would be $2,400 for those trading up to a vehicle that gets at least 7 mpg more than their old one; $3,500 if the trade yields a net 10 mpg gain; and $4,500 for a net 13 mpg gain.

Lobbying's Focus on Trucks

But even the Feinstein measure freezes out people who have moderately fuel-efficient passenger cars and want to trade up for much more efficient vehicles. For example, if someone wanted to trade in a 1995 Ford Taurus that gets 21 mpg for a new Ford Fusion Hybrid that gets 39 mpg, there is no federal incentive other than the one specifically for hybrids. If that same Taurus owner wants to trade up to a Ford Focus, which gets 28 mpg, there is no government incentive at all.

The Sierra Club has endorsed Feinstein's version. Ann Mesnikoff, director of the environmental group's Green Transportation campaign, says the House bill and the similar Senate bill are structured to sell cars more than to get gas guzzlers off the road. She thinks it's not too much to ask that the final legislation does both. "Automakers already produce a fleet of cars that exceed the current 27.5 mpg average…so we should ensure our tax dollars go to help sell cars that are above that average."

Feinstein said she opposed the House bill, noting that a Hummer H3T, which gets 14 mpg city and 18 highway, would qualify for a government incentive. That's because a consumer who owns an old truck that's less efficient than the Hummer could conceivably qualify for thousands to buy the Hummer.

Automakers have focused much of their lobbying on making sure any legislation covers incentives to trade in older trucks for marginally more efficient new ones. That's because the current generation of pickup trucks generally gets at least 2 miles more per gallon than pickups made in the 1990s, and pickups and SUVs pack the best profit margin for automakers. Also, skewing a clunker incentive to fuel-efficient passenger cars would help Toyota (TM) and Honda (HMC) more than General Motors, Ford (F), and Chrysler, given the heavy reliance of the American companies on trucks.

Sales Boost Estimate: 600,000 to 1 Million

With the House passage, Dave McCurdy, president of the industry group Alliance of Automotive Manufacturers, said: "The passage of this legislation is good news for manufacturers, auto dealers, suppliers, and most importantly, consumers. With just-released May auto sales reporting a 31% drop from just a year ago, we can't afford to wait any longer."

The auto industry has seen sales plummet by 36.5% since last year, driving GM and Chrysler into Chapter 11 bankruptcy reorganization, and forcing Toyota to initiate a companywide management shuffle and cancel and delay some new-vehicle plans. Estimates for how much of a boost a clunker bill would provide range from 600,000 to 1 million additional vehicle sales over a year. The auto industry is on track to sell 9.5 million vehicles this year, about a third less than last year and much worse of a drop than what the industry had been used to previously. The House allocated $4 billion to pay for the program.

Proponents of a clunker bill point to the boost European carmakers got from a similar law; last February, sales jumped in Germany by 21%. But given the way the U.S. program is being structured, expectations may be overblown. "This legislation attempts to offer a benefit for the environment and to spur vehicle sales, but the reality is that it does neither very well," said Jeremy Anwyl, CEO of car buying Web site Edmunds.com. "In terms of vehicle sales, the only consumers who will be interested are those willing to take no more than $4,500 for their current car and yet be financially able to buy a new one—quite a narrow profile."

No Trade-In Value

Also, the bill will inevitably be confusing to many consumers. Besides the mpg calculations involved, many would-be car buyers will think that the government voucher comes on top of a trade-in value for their vehicle. Because the vehicles must be scrapped to qualify, though, they have no trade-in value.

Indeed, Edmunds.com's Anwyl suggests that the whole scrappage aspect of the program should be eliminated if the government wants to maximize participation: "If owners of a newer, less fuel-efficient vehicle could get above a fair value for their trade-ins rather than just the government allowance, more people would likely participate and car sales might truly be reignited."

Edmunds.com compiled a list of more than 800 models by year that will qualify for trade-in under the House bill. As vehicles must have been built after 1984, Edmunds took into account vehicles that are worth less in trade or private sale than the government rebate. The vehicles range from a 1990 Mercedes-Benz 300 and a 1993 Lexus ES300 to more recent cars like a 2003 Hyundai XG350.

Some consumers could really leverage the program to get a supercheap new car. Someone driving around a 1990 Jeep Cherokee rust bucket, for instance, could trade it in for a 2009 base-model Nissan (NSANY) Versa—the final price of which, net of the clunker incentive, could be as little as $5,490. Plus, state sales tax on new cars is tax-deductible this year as part of the federal stimulus package.

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