Hybrid Tax Credit

On June 21st 2006, David Leonhardt of The New York Times wrote an article on the end of tax credits for popular hybrid vehicles entitled 'U.S. Hybrids Get More Miles Per Congress'. Here are some snippets:

The point of a tax policy like this — the point of a lot of tax policy, in fact — is to give people an incentive to change their behavior, and persuading Americans to use less oil certainly sounds like one of Washington's priorities these days.

Yet, astoundingly, many of the tax credits are about to be taken away. So if you are thinking of buying a Prius or Camry Hybrid, do it soon, as in this month or maybe next. And if you are wondering whether policy makers mean it when they say they're serious about changing our energy policy, join the crowd.

The first thing to understand about the hybrid tax credit is that it was never really intended to reduce oil imports from the Middle East or slow the effects of global warming. The credit was created to prop up Detroit while giving conservation a nod.

Last summer, when Congress was completing an energy bill, Toyota's and Honda's hybrids were already winning people over in the marketplace, and it was clear that any tax credit would go overwhelmingly to buyers of Japanese cars. So members of Congress, with help from Detroit's lobbyists, came up with an ingenious solution. They created a cap, a maximum number of hybrids that any single manufacturer could sell — 60,000 — before a clock started ticking, causing the credits for that carmaker to begin disappearing two quarters later.

The idea, Mark Kemmer, a G.M. lobbyist, told Automotive News, was to keep any one company from getting "a runaway benefit."

Toyota hit the 60,000 mark last month, less than five months after the Jan. 1 start of the program, and the credits for its hybrid buyers will be cut in half on Oct. 1. On April 1, 2007, the credits will be cut in half again. On Oct. 1, 2007, they will vanish. Honda, for its part, will probably hit the cap next year.

And the Big Three? Combined, they have sold fewer than 15,000 eligible vehicles so far, all by Ford, largely because their hybrids have not impressed buyers. Rather than building highly efficient hybrids like the Prius, Detroit has tinkered with gas guzzlers like the Chevrolet Silverado, adding hybrid technology to them so that they get slightly better mileage.

Come next year, then, the government will pay you to buy a Silverado hybrid (which gets about 16 miles per gallon) or a Ford Escape Hybrid (which gets about 26, according to Consumer Reports), but not a Prius (44) or a nonhybrid Corolla (29).

The obvious answer to this bizarre situation is to remove the caps. To their credit, Mr. Bush and a few members of Congress have called for precisely that, although it seems unlikely to happen anytime soon.

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What the government can do that nobody else can, however, is set up a simple system of rewards and penalties — with the single goal of reducing oil use, regardless of the means — and then let the marketplace work it out. Economists tend to prefer a gas tax, but it's not the only option.

There is already a gas-guzzler tax written into the law that raises the price of inefficient cars, but not of sport utility vehicles or light trucks, notes Therese Langer of the American Council for an Energy-Efficient Economy. Making the tax universal would have a far bigger effect than a narrow policy aimed at hybrids, and it could be balanced by tax credits for efficient vehicles of any kind. Google has a nice template: it gives $5,000 to employees who buy a car that gets at least 45 m.p.g. in the government's ratings, a threshold that only the Prius and two Honda hybrids now meet.