Illinois politicians just can’t keep their mitts off other people’s money. And when the money grab also pleases union bosses and a group of local business owners known for regularly making campaign contributions, the temptation becomes irresistible. Evidently, no one cares if the result is that state residents stand to pay more when they buy a car in the future.
That’s the political calculation behind House Bill 3940, an amendment to the state’s Motor Vehicle Franchise Act that proved wildly popular in Springfield because, on the surface, it helps local constituents at the expense of giant automakers. But as any economist can attest, there’s no free lunch when a state raises the cost of doing business — and Illinois famously excels at that practice.
For years, car manufacturers and their dealerships have grappled over factory reimbursement rates for warranty repairs. Beginning in 2022, Illinois lawmakers put a thumb on the scale, siding with dealers by forcing automakers to pay much more than the previously negotiated rates. Volkswagen filed suit to block the law, calling it “crony capitalism” that takes money from automakers “and, for no public purpose, deposits that money directly into the pockets of politically favored Illinois dealers.” VW claimed that its property, due process, equal protection and even free-speech rights were being violated.
That was a lot of thunder without much rain, and U.S. District Judge John Tharp Jr. on May 6 shot down VW’s challenge, dismissing its claim while leaving the door open for the German automaker to amend and refile the suit. Tharp also clarified that VW can indeed recoup its costs by raising prices, and it’s free to publicly blame the law for the increases.
VW has said the law is adding $10 million a year to its costs in Illinois. When the Big Three and other affected automakers are considered, the industry pegs the additional costs at something like $250 million a year. That number might be exaggerated, but no one should doubt that the stakes are high and, as it stands, the VWs, Fords and GMs eventually will need to charge more to make up for the law.
The manufacturers aren’t likely to keep this a hidden fee. The federal judge has given automakers permission to slap a surcharge on cars sold in Illinois to recover their costs from this law and to inform consumers why they’re paying more.
The Illinois politicians who overwhelmingly backed the legislation (not a single lawmaker, including any Republican, voted no) upset a long-standing balancing act. New and certified pre-owned vehicles come with warranties from the manufacturers. Since legacy automakers are barred from selling cars directly to customers or operating service centers, their dealers perform repairs and updates covered by the warranties. The manufacturers reimburse the dealers for the work.
The amount of the reimbursement, until Illinois pols stuck their noses in it, was less than an everyday car owner would pay if a dealer was performing the same job on an out-of-warranty vehicle. The automakers got a discount partly because of their market power, no doubt, but also because warranty work tends to be done on newer vehicles, and sometimes in large volume due to recalls. The dealers’ service personnel typically get practiced at those tasks and can perform them more quickly than one-off work on older rust buckets.
Dealers understandably want to get paid more for warranty work. Service centers have become an increasingly important source of profit, accounting for a big chunk of the bottom line at most dealerships. Because of inflation and the scarcity of qualified mechanics, dealers are struggling to keep those profit margins plump.
Enter the General Assembly, which rallied around the dealerships, cheered on by union leaders representing automotive technicians. The “Multiplier Act,” as it’s known in Springfield, jacked up the reimbursements to at least the same level as the amount charged retail customers for out-of-warranty work.
In one swoop, Springfield stuck it to the mostly out-of-state and foreign automakers while enriching local dealers and providing more money to pay local technicians. The law passed with overwhelming support, and Gov. J.B. Pritzker quickly signed on.
A few states, including Wisconsin and Minnesota, have similar laws on the books to promote “warranty parity,” as it’s called. Thanks to Illinois, and now the supportive federal court ruling, additional states are also getting into the act. It probably won’t be long before automakers are paying higher warranty-repair costs coast-to-coast.
There’s one additional wrinkle: The Illinois law does not apply to newer electric vehicle makers Tesla and Rivian, because they are authorized to sell directly to customers without a dealer network. The cost of operating an EV is already lower, not only because they require no gasoline, but, significantly in this matter, because they have far fewer parts subject to breakdown and repair.
The dealers and mechanics have won a victory that is likely to raise the relative costs of gas-powered vehicles, hastening a potential decline in the service centers that support them. And, predictably, Springfield helped pave the way.
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