Although at this writing, legislation has not been introduced, there is no doubt that a major attempt will be made this year to reduce or eliminate the 10% federal excise tax on new cars. Total repeal of the 10% would have the immediate effect of lowering the price of a new car an average of $225.  Similarly, used car prices would be dropped an almost equal amount because of the law of supply and demand.

Many leasing executives are unhappy with the possibility of a reduction or elimination of the federal excise tax on new cars because of the effect it would have on used car prices. In finance leasing, the loss could be passed along to the lessee -- although he may be a bit unhappy -- but in maintenance and open end leases, the full blunt of the drop would be borne by the leasing company. Profit margins being what they are, a sharp drop in used car prices could spell the difference between a profit and a loss. To some marginal companies it could be the difference between solvency or bankruptcy.

We sympathize with the problems facing the leasing industry if the federal excise tax is repealed but we suggest that the industry should not go far in its opposition to repeal.

First of all, there is nothing to indicate that the full 10% excise tax will be eliminated, although this is what the auto industry is lobbying for. The federal government received  $1,746,000,000 from the tax on new cars last year and this is a big chunk of revenue for the Treasury to give up. It is more likely that the reduction will be in the area of 5%. And there is a good chance that the reduction will be graduated -- spread over several years. This would soften the blow on used car prices. And it is almost certain that the reduction would be made retroactive. If not, it would result in a severe drop in new car sales. Obviously, a potential new car buyer would hold off buying a new car once he officially hears that a cut in excise tax is forthcoming. By making the reduction retroactive, it would be possible for leasing companies to recoup some of the money they would lose on the sale of the used car. Leases could also be extended to spread out the potential boss.

Leasing officials should also realize that any loss resulting from a reduction in the excise tax is a one-shot deal. The long run effect would be beneficial to leasing companies. We disagree with Jess Raban, executive secretary of the American Automotive Leasing Assn. who said that repeal "would definitely cause a decline in new car sales." Raban feels that with amortization spread over two or three years, the sticker price of a car doesn't mean much. While there is some truth to this, we feel that the effect of a reduction or elimination of the tax would be a boom to auto sales. And the auto companies support this view. The general sales manager of one car company told AF that if the excise tax is repealed, he doesn't know where he will get the capacity to keep up with the demand. And any increased demand for new cars would aid the used car market, helping to offset the initial drop in used car prices.

With lower sticker prices on new cars, the auto industry will pass the full reduction along to the consumer-leasing companies might even attract some new customers. It is an old business adage that the lower price, the more tempting it is to the buyer. So, repeal of the excise tax is not as bad as it seems.