Tax Credits for Hybrid Cars

The standard justification for granting tax credits for hybrid cars is to promote energy efficiency.  Set aside for today whether that is a sensible goal for policy.  This article explains that the federal tax credit is now structured to benefit domestic car manufacturers, with at best ambivalent effects on energy efficiency:

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.

The article goes on to explain that Congress is shifting the credits, in effect, from foreign to domestic manufacturers even though the domestic cars that will qualify for the credit get worse mileage than many non-hyrid vehicles.

The article further notes:

But I think there is a larger lesson here. In recent months, there has been a lot of talk in Washington about alternative energy sources, not just hybrids, but ethanol, fuel cells and nuclear power as well. Mr. Bush, Senator Hillary Rodham Clinton and others are pitching tax credits and similar financing mechanisms to give these technologies a boost.

The reality, though, is that government isn't particularly good at predicting which alternative will pan out. No single person or group is. "You can spend a lot of money on technologies that don't fit," says Susan M. Cischke, Ford's vice president for environmental and safety engineering. Remember the electric-car fad in California?

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.

Well said.

Comments

[Alan Brown]

Makes sense to me. Favoring one technology over another rather rewarding the kind of behavior you want actually slows technological progress. Even people who know what they are doing can't predict which technology is going to win. Trying to favor one technology over others just leads to corruption anyway, as lobbyists work to get into favor.

[thebizofknowledge]

Consumers respond favorably to incentives such as tax credits which put money back into their pockets. It makes no sense to take away these incentives, which should, in fact, be expanded and extended indefinitely.