Industry Pulse: it’s more than just tax cuts impacting the used vehicle market

Posted by Meg Bernazzani on June 3, 2019

At CarGurus, we’re always looking for ways to share more industry insights with our valued dealers. Today, our Director of Automotive Industry and Economic Analysis, George Augustaitis, takes a look at how tax cuts and dwindling inventory are affecting the used car market.

The IRS started to release information on tax returns in the first week of February. As the data from the IRS changed over time, the media released weekly headlines, whipping back and forth between negative and positive:

Tax Refunds down 8.7%…”

Here’s why the average tax refund check is down 16% from last year

After a slow start, tax refunds are ticking up…”

Tax refunds are up from last year…”

About 8 million individuals who received a refund last year may owe this time

To date, the IRS has reported filings through the week ending May 10, 2019, and at first glance, the average refund is down 1.7%.

While the key metrics—total number of refunds, amount of money issued, and average refund—show a negative story, refunds alone aren’t the factor driving change in used car sales in the US.

Smaller tax refunds affecting car sales

In parallel with the Tax Cuts and Jobs Act (TCJA), the Treasury Department overhauled the tax withholdings table. To understand the impact a new withholding table would have on taxpayers, the Treasury Department ran a simulation and estimated that under the new withholding tables, 3 million filers would under-withhold and owe money to the government.

Although many of those 3 million filers received a bit more in each paycheck, many may not have thought about the resulting lower or no tax refund. And, without this seasonal windfall, they had to adjust their car buying habits accordingly.

In fact, CarGurus data shows that there was a change in buyer behavior for some price buckets. For instance, the share of leads for vehicles priced less than $10,000 through the first nine weeks of 2019 (when many receive their tax returns) was below historical norms. From week ten onward, the share of leads did rise above 2018 though.

cargurus-share-of-leads-for-affordable-vehicles

Understanding the impact on high SALT states

Another component of the TCJA affecting car sales is the cap on deductions, specifically, the $10,000 deduction cap on state and local taxes (SALT). Though SALT doesn’t impact everyone in the US, it does impact individuals in certain states, mainly those with high property and income taxes. This year, residents in those states were unable to deduct the same amount of money as they could in the past, and, as a result, may have owed taxes or received a lower refund as compared to previous years.

Isolating the data from two states with high average SALT deductions, New York and Connecticut, we were able to identify slight differences between 2018 and 2019 in car shopping behavior on CarGurus.

While both states followed a similar pattern for share of leads on CarGurus for vehicles priced less than $10,000, New York data was below historical norms through March 3. It then started to behave similarly to 2018 through March 16, before dropping below 2018’s lead share numbers.

The gap between 2018 and 2019 Connecticut data is slightly smaller, when compared to New York, however, New York had more days where 2019 lead share numbers were above 2018. Though shopper behavior in both states is different than its 2018 numbers, it’s not such a large difference that it’s clear that the SALT deduction cap alone had a significant impact on vehicle sales.

Beyond changes to tax refunds, affordable inventory is in limited supply

Beyond tax refunds impacting car buying behavior, there’s a shift in used vehicle inventory in the market.

The bulk of vehicles coming off lease are higher priced—only about 4% of vehicles priced less than $10,000 is comprised of vehicles between model year 2014 through 2019. Looking at 2015 model years, nearly 45% are priced from $20,000 to $40,000. The vehicles that continue to come off lease consist of more SUVs and fewer sedans, meaning there are fewer quality, affordable vehicles coming back on the market.

Another reason for the dwindling supply of affordable used vehicle inventory is the historically low volume of car sales from 2008 to 2011. Typically, the bulk of the supply of used vehicles priced less than $10,000 is made up of vehicles that are eight to eleven years old. Instead, only around 40% of vehicles in that price bucket are from model year 2008 through 2012, or vehicles that were sold during that time period.

share-of-inventory-by-price-bucket

Changing market brings opportunity for dealers

Unfortunately, it’s not as easy as saying TCJA and SALT have impacted vehicle sales though. While both likely had an impact on consumer shopping behavior, the lack of affordable inventory may be driving more of the change in purchase habits and traffic. This limited supply is causing shoppers to either buy a vehicle in a higher price range or delay the purchase until they find the vehicle that meets their needs.

For dealers, this means it’s more important than ever to focus on acquiring quality, low-priced used vehicles. With more affordable, like-new vehicles on your lot, you’ll be able to capture shopper interest and stand out from the competition.

Topics: CarGurus data, industry news, industry pulse, trends