The used auto market in the U.S. is extremely important. In fact, pre-owned vehicles make up as much as 75% of automotive sales in the United States, and used vehicle sales have actually been on the rise for seven consecutive years. As 2019 approaches, however, though dealers can remain optimistic about their auto sales and revenue streams, they are beginning to worry about the various taxes that will impact the auto sector.
After Americans get their tax refunds, they likely look to make a big purchase, often including a new or used vehicle. That might not be the case over the next few months, however.
According to Automotive News, the increase in auto purchases typically fueled by tax refunds might not come to fruition after this year’s tax season.
The 2017 changes to tax legislation will most likely reduce the number of car shoppers with sizable refunds.
“Tax-refund season could be a disaster this year,” said Jonathan Smoke, chief economist at Cox Automotive. “A higher percentage [of consumers] is going to have less money, no money or even owe money. And we know the material role it plays in the used-vehicle market, but also broadly in the economy.”
Although Americans fail to pay $458 billion in taxes every year, the auto market seemingly always enjoyed a boost following tax season. The new legislation actually changes the way taxes are even calculated. Prior to this tax season, consumers were withholding a significant amount of money, resulting in large refunds — but not anymore.
As Americans received a large tax refund, they would often spend, spend, spend. Throughout 2017, the Internal Revenue Service (IRS) issued over $302 billion in refunds, resulting in an average of approximately $2,782 per individual tax filer. Additionally, the IRS sent back $324.43 billion in refunds throughout 2018, resulting in an average of $2,899 per refund. That average of near $3,000 was perfect for used car buyers, since the most frequently searched vehicle price range is $5,000 or less. That won’t be the case this year, even as 62% of American taxpayers admitting to expect a similar refund after this year.
“The silver lining for dealers is that maybe the complexity of the withholding tables and changes are such that the lower-income households who drive the majority of used vehicle purchases in that time of the year, maybe they’re not as affected,” Smoke added.
Despite these major tax refund changes, Americans still need quality, reliable, and affordable vehicles. So the used vehicle market should be fine, but it will certainly have to make some adjustments.