It seems many of those who took advantage of the 'Cash For Clunkers' program didn't think about the tax implications.
Yep. That US Government rebate of $3,500 or $4,500 is counted as cash in your hands, thereby attracting at least State income tax, if not Federal as well (I don't know if C.F.C. money is exempted from Federal taxation). Furthermore, it's not treated as a trade-in for purposes of sales tax. If you traded in your old vehicle in the normal way, and got (say) $4,500 for it, that would be deducted from the total price of the new vehicle you wanted to buy, and you'd pay sales tax on the difference. On the other hand, if you take Cash For Clunkers money instead of a trade-in, that doesn't get deducted from the retail price of your new vehicle, and you pay sales tax on the entire amount.
For folks in more-highly-taxed states, this combination may mean that they have to find several hundred dollars out of their own pockets to pay for the 'help' that Uncle Sam handed out so generously. I'm sure they're really happy about that.
Karl Denninger adds a final observation:
I have also received several emails informing me that dealers had customers so giddy over the "free cash" that they were selling cars at full sticker price besides - effectively, in many cases, turning the entire "cash for clunkers" money into pure dealership profit and managing to charge you tax (twice) on it as well. Ain't car dealers grand (several grand out of your pocket, that is!)
Why am I not surprised to hear this?
Moral of the story: Beware of a socialist Uncle Sam bearing gifts!