Sunday, June 18, 2006

previous entry | main | next entry | TrackBack (0)

Wacky government incentives

In moving to Massachusetts, the Drezner family needs to buy a second car, and we're thinking about a Prius (like Virginia Postrel, I like the styling as well as the gas mileage).

This caused us to stumble onto one of the odder tax credit schemes I've seen, the 2005 Energy Policy Act's credit for qualified hyrbid vehicles. The credit is based in part on the fuel-efficiency of the hybrid vehicle, which makes sense... sort of (why someone should get a tax credit of over $1,500 for a Lexus GS 450h when its gas mileage is below a lot of non-hybrid cars on this list is beyond me).

What makes no sense to me at all is the tax credit's half-life. Here's the IRS's explanation:

Consumers seeking the credit may want to buy early because the full credit is only available for a limited time. Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th vehicle. For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, taxpayers may claim 50 percent of the credit. For the fourth and fifth calendar quarters, taxpayers may claim 25 percent of the credit. No credit is allowed after the fifth quarter.
Unless it was designed to reduce the fiscal impact of the tax credit, this makes no sense to me. All it does is give people an incentive to buy cars in the first half of the year. If anything, the incentive penalizes brands and models that perform well -- since they would hit their cap quicker than less appealing brands.

Knowledgable readers are implored to comment on any rational reason for puting a quantity cap on the tax credit.

It should be stressed, however, that this is not the most bizarre government incentive scheme in recent years. No, you're going to have to click here to read about the government incentive scheme that generated the most bizarre, disturbing -- and yet thoroughly predictable -- response.

posted by Dan on 06.18.06 at 09:26 AM


I suspect it is designed to "prime" demand, by getting people who might otherwise be hesitant to buy a hybrid to do so. I suppose the thinking is that once a critical mass of those cars is out there, that hesitancy will decline, and they'll compete more evenly with the old internal-combustion technology that's been around a century.

Now, where the "60,000 per model" number came from, I don't know; that seems like a pretty small number to me...

posted by: Pooka on 06.18.06 at 09:26 AM [permalink]

It's a subsidy to domestic automakers.

Toyota will go well over the 60k mark. Ford (with the Escape) and GM will not.

Toyota's per-hybrid subsidies will be much, much lower than GM and Ford's. If/when GM/Ford start selling more hybrids, expect the cap to be raised to above the GM/Ford sales, but below the Toyota ones.

posted by: secret asian man on 06.18.06 at 09:26 AM [permalink]

Otto von Bismark said one should never watch sausage or law being made - ditto for the tax code.

I didn't buy a hybrid, but a Pontiac Vibe with a 4-banger is a really nice car in and out of town, with great mileage even with my lead foot I drive the 5-speed, also in auto trannie.

It is a joint venture vehicle with Toyota, I think their version is a Matrix or something llike that.

posted by: save_the_rustbelt on 06.18.06 at 09:26 AM [permalink]

Its specifically to NOT favor Toyota & Honda. The law was written so that Toyota and Honda would quickly reach their quota and exceed the limit, but so it will remain for GM's crap-tacular hybrids until GM manages to sell >60k of them.

Because if it was a "Total number sold" cutout, then almost all the benefit would go to Honda and Toyota.

As for the Vibe, it is the "Corrola Matrix" with different body work. Its made in the US at the NUMMI plant in Freemont.

And the "Corrola Matrix" is the corrola station wagon with ugly body work, so americans don't realize its a station wagon.

posted by: Nicholas Weaver on 06.18.06 at 09:26 AM [permalink]

And the "Corrola Matrix" is the corrola station wagon with ugly body work, so americans don't realize its a station wagon.

Well, I like the Vibe anyway, the mileage is excellent and the interior very useful without buying a van or full sized SUV.

My children will borrow it so it is not classified as a "grocery getter."

posted by: save_the_rustbelt on 06.18.06 at 09:26 AM [permalink]

I gotta say, the Prius is an ugly, ugly car. It's only its gas mileage that's beautiful.

posted by: Klug on 06.18.06 at 09:26 AM [permalink]

There has been some rumble about battery problems in the Prius and other hybrids. (?) Buyer beware.

Ford is going to build 2 or 3 assembly plants in Mexico and one in the south, so the old "buy American" concept if just about officially dead.

posted by: save_the_rustbelt on 06.18.06 at 09:26 AM [permalink]

Don't blame the IRS. Congress wrote the wacky law.

posted by: Clara on 06.18.06 at 09:26 AM [permalink]

Don't blame the IRS. Congress wrote the wacky law.

posted by: Clara on 06.18.06 at 09:26 AM [permalink]

Everyone's hit it right on the head with the nod to domestic automakers.

I had a Prius for 2 years and 30K miles and it was a dream car. I highly recommend it.

posted by: Konczal on 06.18.06 at 09:26 AM [permalink]

Congress has a very confused understanding of incentives inserted into the tax code.

On the one hand, taxpayers are supposed to modify their behaviors in order to maximize their tax benefits provided by the particular incentive. On the other hand, these changed behaviors are expected to have no other economic effect whatsoever, except to deny the government the specific tax revenues assumed to be foregone as a result of the incentive's provisions.

So they use a static model to project revenues, spending, and the deficit, while apparently intending to ignore all other effects of the taxpayers' changed behaviors.

In this case, they wanted to incent buyers of hybrids with higher than normal fuel efficiency, but to limit the apparent cost under the static model, hence the 60,000 unit cutoff. It had the additional benefit of mollifying the non-Toyota and non-Honda constituences offended by the support offered to those two companies (the only ones with truly high-mileage hybrids, there is a measurement of the differential between hybrid MPG and an equivalent non-hybrid model's MPG).

Ugly, hateful sausage-making process.

posted by: Seppo on 06.18.06 at 09:26 AM [permalink]

I gotta say, the Prius is an ugly, ugly car.

VW sold an awful lot of even uglier cars some years back. Some looks just have a way of growing on you.

posted by: modus potus on 06.18.06 at 09:26 AM [permalink]


I bought a used Civic Hybrid in April. It had 70,000 miles on it, but we love it. We're getting 41 miles per gallon driving around town every day. The best thing is, buying used, the hybrid premium disappears. In fact, we got the car for less than you would pay for a conventional Civic of the same year and mileage. If you can find a used hybrid, it may be the best deal for you.

posted by: David Pinto on 06.18.06 at 09:26 AM [permalink]

The Prius is a great car. The one my family has (purchased in 2002 I believe) runs great and has never had any major problems (unless you count friendly waves from other Prius drivers as a problem)...

posted by: Laura O. on 06.18.06 at 09:26 AM [permalink]

Post a Comment:


Email Address:



Remember your info?