'Cash for Clunkers' Bill Passes

By David Kiley

Senate Democrats defeated a Republican effort to kill a $1 billion "cash for clunkers" program that provides government incentives of $3,500 to $4,500 to car buyers who trade in old gas guzzlers for more fuel-efficient vehicles.

But in passing the bill on June 18 as an add-on to funding for the wars in Iraq and Afghanistan, Democrats also defeated the "green" wing of their own party, who wanted to do much more to favor the purchase of passenger cars over pickup trucks and SUVs. The bill, which President Barack Obama is expected to sign, will enable many consumers who take advantage of the program to buy trucks that are barely more fuel-efficient than their old guzzlers.

"This is an emergency for families and small businesses—for an industry that has been the backbone of our economy for a generation," said Senator Debbie Stabenow (D-Mich.), who sponsored the Senate bill.

Here's how the program will work: Car owners can get a voucher worth $3,500 if they trade in a vehicle whose original gas mileage was 18 miles per gallon or less for a vehicle that gets at least 22 mpg. The value of the voucher would grow to $4,500 if the mileage of the new car is 10 mpg higher than the old vehicle. The miles-per-gallon figures are listed on the new car's window sticker. The fuel economy of a consumer's existing vehicle and the one he or she wants to buy can be researched at the U.S. Energy Dept.'s site www.fueleconomy.gov.

Owners of sport-utility vehicles, pickup trucks, or minivans that get 18 mpg or less would receive a voucher for $3,500 if their new truck or SUV gets at least 2 mpg higher than their old vehicle. The voucher would increase to $4,500 if the mileage of the new truck or SUV is at least 5 mpg higher than the older vehicle.

Ford (F) and General Motors, for example, have increased the fuel economy of their pickups since the 1990s by 2 mpg, so truck buyers can pretty much trade up to newer versions of the same vehicle. Many SUVs have gained a few miles per gallon by going from pickup-based engineering platforms to lighter-weight car platforms.

BROADER TRADE-IN MEASURES REJECTED

Left completely out of the program are car owners who might want to trade in an old car that gets, say, 20 mpg for a new one that gets 35 mpg or greater. Also, Senator Dianne Feinstein (D-Calif.) had sponsored a version of the bill that would have included an incentive to buy certain fuel-efficient used cars to put the program in reach of lower-income consumers. But the measure failed. An earlier version of the House bill, which passed on June 9, had given mass-transit vouchers to consumers who traded in an old gas guzzler that met the bill's criteria. That, too, was cut from the final bill.

Environmental advocates had hoped for language that was less favorable toward purchasing SUVs. "The House deal really undercut the possibility of ensuring that taxpayer dollars go to subsidizing the most efficient vehicles out there," said Ann Mesnikoff, director of the Green Transportation Campaign at the Sierra Club. "Subsidizing vehicles that are only nominally better doesn't make a lot of sense."

In the end, the bill was written to help companies, especially in Detroit, sell more pickups and SUVs, which earn the struggling automakers more profit than smaller, fuel-efficient vehicles.

Congressional opponents of the program, mostly Republican, complained Thursday that the "clunkers" bill would increase the federal debt without doing much to get expensive-to-operate vehicles off the roads. But supporters of the program overcame a procedural hurdle erected by the plan's leading opponent, Senator Judd Gregg (R-N.H.), on a 60-36 vote, winning the minimum number of votes needed to keep the program in a $106 billion war-spending plan.

"Cash for clunkers will benefit everyone from the consumer looking for the extra incentive to purchase a new car, to the communities who will receive additional tax revenue from the sales of new vehicles," said Dave McCurdy, CEO and president of the Alliance of Automobile Manufacturers, which lobbied heavily for the bill.

AUTO DEALERS EXPECT CONSUMER CONFUSION

Car dealers, while happy about the bill, are bracing for confusion on the part of consumers. Perhaps the biggest source of misunderstanding, say industry analysts, will be when consumers realize that they get zero dollars for the trade-in value of their old car or truck, and that the only money they get toward the purchase of a new vehicle is the government money. Since the old cars will be scrapped, they have no resale value to the dealer.

The program, which is expected to begin in early August, should help dealers clear out inventory before the new 2010 models arrive. Edmunds.com estimates the program could add 600,000 to 1 million new vehicle sales in the next 12 months.

Despite billions in government aid to shore up the nation's car industry—especially GM, Chrysler, and parts makers—U.S. auto sales dropped 34% last month compared with May 2008. China, Japan, Britain, Germany, and several other countries have already passed fleet-modernization bills that have boosted sales.

The U.S. industry is expected to generate about 9.5 million vehicle sales in 2009, compared with more than 13 million in 2008 and more than 16 million in 2007.

With reporting by the Associated Press.

Kiley is a senior correspondent in BusinessWeek's Detroit bureau.