Wednesday, June 21, 2006

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Wacky government incentives, continued

A quick follow-up to my post on the bizarre tax incentives for hybrid vehicles.

As fate would have it, David Leonhardt at the New York Times looks at this scheme and confirms the explanation made by many commenters in the last thread -- the goal of the tax credit is to help the domestic auto industry, not energy conservation:

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. (Because there are waiting lists for the Prius and Camry Hybrid, people who buy one in August or September may get their car after 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).

I'll close this post with an e-mail excerpt from a good friend and high-powered Chicago lawyer who shall remain nameless:
Much of the law has a kind of internal coherence. The common law, especially, is a kind of organic effort to rationally work out social ordering. Federal statutes are often broad efforts to impelement a basic policy objective -- sometimes successfully, sometimes not. Because the law "makes sense" much of the time, one can usually infer the "purpose" of a law from its provisions.

When I took tax in law school, I learned exactly one thing: Do not spend any time trying to make sense of tax law. It has no coherence. It is pure sausage. Special interests get the most they can get away with, and if what they fail to get often does not reflect any argument they lost but instead reflects the limits of their power weighed against other budgetary considerations.

posted by Dan on 06.21.06 at 01:56 PM


It occurs to me that eliminating the market distorting mortgage interest deduction would probably have more effect in reducing energy consumption. Fewer McMansions would be built, requiring less energy heating and cooling, and some people would choose to remain renters in high density housing closer to their place of work, thus tranportation energy expenditures would go down. Of course the dreaded realitor lobby and the developers would fight to keep it -- just a pipe dream of fair treatment for us renters.

posted by: Mitchell Young on 06.21.06 at 01:56 PM [permalink]

Just another illustration showing why I either laugh or check my billfold anytime someone suggests "sensible energy policy" will help deal with the petroleum situation.

posted by: TJIT on 06.21.06 at 01:56 PM [permalink]

Your Chicago lawyer friend's statement is simply self-obvious to anybody with the slightest understanding of the tax code and the use of it for multiple purposes other than simply raising revenue. It is, of course, the nexus of Congressional power, and the lever by which Members can play interest groups against each other for partisan purposes, policy purposes, and the Members' own benefits.

It is the single largest driver of a corrupt culture and a structural defect that ensures that corruption will never be banished.

The sad part is that some naive, deluded do-gooders think that they are benefiting society by inserting provisions of tax credits for buyers of hybrid vehicles. No matter how the credits might have been structured, the effort would inevitably led to misalloction of resources while at the same time furthering a corrupt political structure. A very dubious home run...

posted by: Seppo on 06.21.06 at 01:56 PM [permalink]

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