Option 36:

Make Permanent the Deduction for Auto Loan Interest Paid

Topline Estimates

Gross Domestic Product (GDP)
-<0.05%
Gross National Product (GNP)
-<0.05%
Full-Time Equivalent Jobs
-17K
Wage Rate
-<0.05%
Capital Stock
-<0.05%
Conventional Primary Deficit Change (10‑Yr)
+$33.7B
Dynamic Primary Deficit Change (10‑Yr)
+$44.5B
Dynamic Total Deficit Change (10‑Yr)
+$52.0B

Source: Tax Foundation General Equilibrium Model.

The One Big Beautiful Bill Act of 2025 created a temporary deduction for auto loan interest paid. The deduction is available to all taxpayers regardless of whether they itemize. It allows a deduction of up to $10,000 per tax return in interest paid on auto loans for new vehicles assembled in the US. The deduction phases out for taxpayers with modified adjusted gross income (MAGI) exceeding $100,000 for single filers or $200,000 for joint filers, and fully phases out when income reaches $150,000 for single filers or $250,000 for joint filers. The deduction lowers marginal tax rates on income and reduces the cost of purchasing qualifying vehicles. It is scheduled to be in effect for tax years 2025 through 2028, after which it expires.

This option makes the deduction for auto loan interest paid permanent. By reducing the cost of a narrow type of consumption, the option would increase returns to labor, but the phaseout would create higher effective marginal tax rates for some taxpayers as well, resulting in a nearly negligible impact on economic output.

On a conventional basis, this option would increase the primary deficit by $33.7 billion over the budget window. Long-run GDP and GNP would both decline slightly. On a dynamic basis, the primary deficit would increase by $44.5 billion from 2027 through 2036, $10.8 billion more than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be higher than baseline, reaching 176.4 percent by 2056.

On average, in 2036, taxpayers would see slight increases in their after-tax incomes. Taxpayers in the top 10 percent would not benefit due to the phaseout, while all other income groups would see small increases in after-tax income on a conventional basis. On a long-run dynamic basis, taxpayers would see a slight decline in after-tax income on average.

Modeled Results

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About the Authors

Erica York Tax Foundation
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Erica York

Vice President of Federal Tax Policy

Erica York is Vice President of Federal Tax Policy with Tax Foundation’s Center for Federal Tax Policy. Her analysis has been featured in The Wall Street Journal, The Washington Post, Politico, and other national and international media outlets.

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Garrett Watson

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Garrett Watson is Director of Policy Analysis at the Tax Foundation, where he conducts research on federal and state tax policy. His work has been featured in The Washington Post, The Atlantic, Politico, the Associated Press and other major outlets.

Huaqun Li Tax Foundation
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Huaqun Li

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Dr. Huaqun Li is Senior Economist, Director of Modeling Projects at the Tax Foundation. She focuses on developing and maintaining the Foundation’s Taxes and Growth Model, which models the budgetary and economic effects of changes to federal tax policy.

William McBride or Will McBride Tax Foundation
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William McBride

Chief Economist & Stephen J. Entin Fellow in Economics

Dr. William McBride is the Chief Economist & Stephen J. Entin Fellow in Economics at the Tax Foundation, where he oversees major research projects primarily related to reforming the federal tax code, advancing sound tax policy, and improving the federal government’s fiscal outlook.

Alex Durante Tax Foundation
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Alex Durante

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Alex Durante is a Senior Economist at the Tax Foundation, working on federal tax policy and model development. Alex worked as a research assistant at the Federal Reserve Board and served as a staff economist on the Council of Economic Advisers.

Alex Muresianu Tax Foundation
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Alex Muresianu

Senior Policy Analyst

Alex Muresianu is a Senior Policy Analyst at the Tax Foundation, focused on federal tax policy. Previously working on the federal team as an intern in the summer of 2018 and as a research assistant in summer 2020. He attended Tufts University, graduating with a degree in economics and minors in finance and political science.

Peter Van Ness Tax Foundation

Peter Van Ness

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Peter Van Ness is a Research Software Developer at the Tax Foundation working on federal tax policy and model development. Peter previously worked as a research assistant at another think tank and as a data analyst at a consulting firm.

Aleksei Shilov Tax Foundation Research Software Developer

Aleksei Shilov

Research Software Developer

Aleksei Shilov is a Research Software developer at the Tax Foundation working on economic model development and federal tax policy. Aleksei joined the Tax Foundation as an intern in January 2025. He holds a B.S. in computer science and a minor in economics from Northeastern University and is currently based in Boston, MA.

Daniel Bunn Tax Foundation President & CEO
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Daniel Bunn

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Daniel Bunn is President and CEO of the Tax Foundation. Daniel has been with the organization since 2018 and, prior to becoming President, successfully built its Center for Global Tax Policy, expanding the Tax Foundation’s reach and impact around the world. Prior to joining the Tax Foundation, Daniel worked in the United States Senate at the Joint Economic Committee.