The U.S. has a new incentive for the purchase of U.S.-assembled vehicles; should Canadians be concerned?

New tax incentives that encourage Americans to buy American-assembled automobiles would probably be a significant cause for concern any other year and should probably be a cause for concern now, according to one expert.

"But the reality is there are other, bigger, more problematic fish to fry than that right now," Greg Mordue said. 

The professor in the faculty of engineering at McMaster University said the federal tax deduction for interest paid on some vehicle loans is "probably not the most devastating thing that has happened to the Canadian automotive industry."

But "that's all relative in the context of 2025," Mordue said.

He called the initiative "one more thing."

The new incentive was contained in U.S. President Donald Trump's so-called "big beautiful bill," which became law on July 4.

It allows some taxpayers to deduct up to $10,000 US of interest payments annually on loans for new American-made light-duty vehicles from 2025 through 2028.

Tax incentive follows tariffs targetting Canadian auto sector

It only applies to vehicles purchased for personal use, not fleet vehicles or commercial vehicles, and the deduction phases out for individuals with incomes between $100,000 and $150,000 or joint taxpayers with incomes between $200,000 and $250,000.

Its introduction follows Trump's decision to levy 25 per cent tariffs on Canadian-assembled automobiles and auto parts that are not compliant with the Canada U.S. Mexico free trade agreement (CUSMA). 

Industry executives have lobbied against the tariffs arguing they will drive up vehicle prices for consumers.

But, Trump pledged while campaigning last year to make interest on car loans tax-deductible, saying it would make car ownership more affordable and "stimulate massive domestic auto production."

At a 9.3 per cent interest rate, an average new vehicle buyer could save about $2,200 on taxes over four years, according to Jonathan Smoke, chief economist at Cox Automotive. 

Asked about the impact of the provision, Mordue said, "it has an effect around the margins … and all I can say is it's not positive, but frankly, there's a lot more devastating things happening to the Canadian automotive industry right now than that aspect."

U.S. automobile dealers sold 15.9 million new light vehicles last year, a little over half of which were assembled in the U.S, according to Cox Automotive. It says around 60 per cent of retail sales are financed with loans. 

An estimated 3.5 million new vehicle loans could be eligible for the tax break this year, if purchasing patterns stay the same, Smoke said.

The tax break applies to vehicles assembled in the U.S., no matter where the company making them is headquartered. 

Different levels of U.S. assembly

All Tesla vehicles sold in the U.S. are assembled in the U.S. 

So are all Acura brands, the luxury model of Japanese automaker Honda. 

Last year, 78 per cent of Ford vehicles sold in the U.S. were assembled in the country, according to Cox Automotive. 

General Motors assembles all of its Cadillacs in the U.S. But just 44 per cent of its Chevrolets sold last year were assembled in the U.S., and just 14 per cent of Buicks, according to Cox Automotive. 

That's a lower U.S-assembled rate than Honda (60 per cent), Toyota (52 per cent) and Nissan (48 per cent), which all are headquartered in Japan.

The jury is out on whether the tax break will boost vehicle sales in the U.S.

At Bowen Scarff Ford in Kent, Wash., customers started asking about the auto loan tax deduction before Congress had even taken a final vote on the tax-cut bill, said general manager Paul Ray. 

"I think it's going to help incentivize vehicle purchases through this year," Ray said.

Celia Winslow, president and CEO of the American Financial Services Association, concurred.

"For some people deciding — 'Should I buy it; should I not?' — this could be something that tips the scale," she said.

Others remain sceptical. 

According to Smoke's math, the average annual tax savings is smaller than a single month's loan payment for a new vehicle.

"I don't think it moves the needle on somebody on the fence of buying a new vehicle or not," Smoke said

"But I think it could influence their decision to finance that vehicle instead of paying cash or instead of leasing a vehicle."