IRVINE, Calif., and SANTA MONICA, Calif. — The fiscal cliff
is all the talk in Washington, D.C., since lawmakers must decide if
the Bush-era tax cuts and a 2-percentage point payroll tax deduction among
other elements will be extended by Jan. 1. Kelley Blue Book did some
calculations recently to find out exactly what these tax issues mean to a
typical consumer, and more importantly, to a potential buyer at a dealership.

Senior market analyst Alec Gutierrez figures a 2-percent
bump in taxes on a household earning $100,000 per year would equate to $2,000
per year in additional taxes, or roughly $166 per month.

"This sum is equivalent to a lease payment on a brand-new
subcompact and covers about half of a typical car payment on a midsize sedan,"
Gutierrez said. "If this tax break is allowed to expire, given the fact that
many household budgets already are stretched as far they can go, this could put
some buyers on the fence about staying out of the market."

If, in fact, the tax cuts are allowed to expire, Gutierrez
fears the population could see an already sluggishly growing economy slump into
reverse.

"This is bad news for those banking on vehicle sales
continuing their recovery into 2013. While each of these tax cuts could
negatively impact the auto industry if allowed to expire at the end of this
year, the payroll tax holiday is perhaps of most importance to the average car
buyer," Gutierrez said.

Unless the economy slips back into recession, KBB indicated
the industry is still bullish on new-vehicle sales for 2013.

Kelley Blue Book expects an annual increase of 300,000 to
500,000 consumers reaching the end of their lease term in 2013, which should
help drive sales even if economic growth slows down.

Kelley Blue Book also anticipates consumers impacted by
Hurricane Sandy will continue to seek replacement vehicles into 2013, which
will help keep demand strong.

"Now that the election is behind us, the nation will be
waiting on pins and needles as the -resident and Congress work together to
address the looming fiscal cliff," Gutierrez said.

Ford's Perspective on Fiscal Cliff

Executive chairman Bill Ford told Bloomberg earlier this
week that a deal between President Barack Obama and Congress to avoid the
fiscal cliff is critical to the U.S. economy's health

"It's vitally important for the economy that we work this
out," Ford said in this online report. "I clearly hope we get some bipartisan
effort to avoid the fiscal cliff."

Ford chief executive officer Alan Mulally joined other
business leaders who met with Obama recently to discuss the assortment of tax
increases and other legislative changes that would take effect at the end of
the year.

Bill Ford reiterated to Bloomberg that the fiscal cliff
could threaten the hopeful recovery of the U.S. economy.

"It's going to help the country," Ford said. "Ford is not
isolated from what happens to the rest of the economy."

Edmunds.com Not Expecting Major Changes

Edmunds.com chief economist Lacey Plache thinks the
likelihood is not high that all of these tax changes will occur.

"President Obama repeatedly has proposed extending the
majority of these tax cuts for most taxpayers," Plache said in an analysis.

The site's economist said Obama likely will extend the lower
Bush-era income tax rates, dividend tax rates and capital gains tax rates for
the 98 percent of taxpayers earning less than $250,000 in annual income if
married and less than $200,000 in annual income if filing single.

"President Obama also supports eliminating itemized
deductions for housing, healthcare, retirement and childcare for only
individuals with more than $1 million in annual income, and limiting the
benefit of itemized deductions to 28 percent for only taxpayers in higher rate
brackets," Plache said.

"In short, his preferred changes would be targeted at upper
income Americans and preserve the status quo for the middle class and below,"
she continued. "The Republicans, on the other hand, have strongly objected to
tax increases for any income levels, supporting spending cuts as a means to
reduce the deficit.

"Currently, the potential compromise that comes up most
frequently is to limit tax rates changes to households with more than $1
million in annual income and make up the difference with cuts to entitlement
spending," Plache went on to say.

So what does that debate mean for a dealer wanting to turn
inventory?

"The likely tax rate changes should not substantially lower
car sales in the near term," Plache said. "In the longer run, though, the
growth of car sales could slow if higher tax rates for the ‘wealthy' result in
enough less spending and investment that job cuts result."

To read more on what Plache had to say, see her analysis
here.


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