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Senate Tax Reform Could Hurt Texas Dealerships

November 30, 2017 0 Comments

In the state of Texas, driving isn’t a convenience; it’s a necessity. The average Texas motorist logs over 16,000 miles per year, which is higher than the average American. In the U.S., nearly 1 in 10 new vehicle registrations occur in Texas.

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Interstate 35 near San Antonio, Texas

As such, policies that affect the automotive industry tend to have a greater impact on Texas.


The current tax reform being considered by Congress has benefits for the Lone Star State in the form of a rule allowing local dealers to deduct “floor plan interest expense” paid on loans they use to purchase cars.

Earlier in November, the U.S. House passed the Tax Cuts and Jobs Act, a “comprehensive reform of the nation’s tax code” with the aforementioned rule in place. However, the Senate version of the reform removes much of the deduction dealerships can have, which could “force some dealerships in Texas to shutter”, devastating motorists and jeopardizing over 200,000 jobs.

The floor-plan loans enable dealerships to fill their lots. As an example, Southwest Ford in Weatherford run by Charles W. Gilchrist, has over over 750 vehicles on the lot – some $40 million in inventory.

“Running the numbers for my own dealership paints a bleak picture,” Gilchrist wrote in an “Other Voices” piece featured in the Star-Telegram.

Gilchrist’s current interest rate on his floor-plan loans is 5.75 percent, amounting to $2.3 million a year in interest. Luckily, that sum is deductible from taxable income – at least for now.

“But if the Senate bill becomes law, we’ll be able to deduct only 30 percent of that interest,” Gilchrist wrote. “This would boost our taxable ‘income’ by over $1.6 million, increasing our tax bill by a whopping $650,000. And that would crush our business.”

Borrowing so much capital is risky, he acknowledged, especially for dealerships as they tend to be smaller operations. According to Gilchrist, many Texas dealerships employ about 50 people. Plus, with the competition between same-brand dealerships, profit margins on new cars tend to be slim.

“We take this risk because our customers expect us to. Most would never buy a car without comparing various models, considering different upgrades, and taking a few test drives,” wrote Gilchrist.

What happens if dealerships aren’t able to deduct interest expenses paid on floor-plan loans? It will become much more difficult to keep vehicles in stock, and will make it difficult for small dealerships to stay in business. Those which do stay afloat would have to raise prices to get by.

“Ending this deduction wouldn’t just hurt car dealers and those in the market for new cars — it could jeopardize jobs and devastate the retail sector,” wrote Gilchrist. “In Texas, new car dealerships support 220,000 jobs that pay out $6.8 billion in salary and wages each year. And cars account for 20 percent of retail sales. A wave of dealership closings would put all of this at risk.”

It’s critical to keep the floor-plan loan deduction rule in place, Gilchrist argued. If it’s removed, its absence will hurt Texas motorists, lead small businesses to go under and put employees out of work, and harm the local economy.

About the Author:

The DrivingSales News team is dedicated to breaking the relevant and the tough stories affecting car dealers. Have questions for DrivingSales News? Reach the team at news@drivingsales.com.

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