Trump wants to make loan interest on domestic cars tax deductible. Here's what experts think.

Yahoo

05-03-2025

During Donald Trump's speech Tuesday before a joint session of Congress, the president reiterated his promise to make interest on car loans tax deductible — but only if the vehicle is made in America.
The idea is widely seen as a lemon among tax policy experts, who view it as a gimmicky carve-out that, depending on how it's structured, could disproportionately benefit well-off taxpayers buying more expensive vehicles. Alan Cole, a senior economist at the conservative-leaning Tax Foundation, called it a 'C-, D+' proposal, that — from an economic standpoint — would be 'worse than just doing the normal thing and cutting income taxes.'
Exactly how much the deduction would cost the government and how much it might save a typical car buyer is unclear for now because the White House hasn't yet shared key details of the idea.
How much will it cost?
The Tax Foundation has estimated that making all auto-loan interest deductible for people who itemize their taxes would cost about $61 billion over 10 years. The benefit would only go to a narrow slice of Americans, since just 1 in 10 taxpayers actually itemize. Those families tend to be wealthier: About two-thirds of households making more than $500,000 itemize their returns versus 11% of those making between $50,000 and $100,000. And of course, the bigger the car payment, the bigger the deduction.
The proposal would be pricier if it were structured as an above-the-line deduction, which is available to all taxpayers regardless of whether they itemize. The Tax Policy Center's Len Burman calculated that would cost $10 billion per year. (Another way to think of it: That's how much cash consumers as a whole would pocket annually thanks to the policy).
Neither group has estimated how much the deduction would cost if it were limited to American-made vehicles. It's also possible that Republicans would try to limit its benefits to middle-income households.
How much could car buyers save?
For the typical buyer, the deduction could shave a few hundred dollars a year off their auto payments. For illustration purposes, here's a little back of the envelope math.
According to the credit reporting agency Experian, the average loan for a new car was just under $41,000 with a 6.8% interest rate. With a 60-month loan, that would be a $807 monthly car payment, including $2,568 in interest during the first year. For a household in the 24% income tax bracket, deducting that could save $616 in the first year, and $1,794 over the life of the loan.
Whether Trump's policies on the whole would make cars more affordable is another issue, though, given that tariffs on autos as well as their inputs like steel and parts could force up their cost by far more than the value of the deduction.
Rather than helping buyers save, making auto-loan interest deductible might also end up encouraging them to buy a more expensive vehicle or borrow more instead of trying to pay cash, much the way economists believe the mortgage interest deduction has historically inflated housing prices by incentivizing families to buy larger and pricier houses without meaningfully increasing homeownership rates.
Notably, the tax bill Trump signed during his first term majorly curtailed the mortgage deduction as part of its effort to simplify the tax code.
Jordan Weissmann is a Senior Reporter at Yahoo Finance.