The bad way to "cut" taxes

Most of you probably know that I support tax cuts as part of the ideal of limited government. However, there's a particular tax cut I oppose: those that are a form of legal plunder.

Legal plunder is not always government giving money to a special interest group, like ethanol subsidies. With greater frequency, legal plunder manifests itself when government offers "tax credits." It's still a subsidy when government taxes a special interest less than everyone else (or not at all). This is a Very Bad Thing because government has decided that a certain economic activity is better than its alternatives -- such a decision is best left to the consumer. Worse, tax credits typically prop up inefficient industries, skewing natural market forces in favor of those who otherwise couldn't compete.

Tax credit worth up to $3,400 adds incentive to buying hybrid
Fri Aug 19, 4:59 PM ET

WASHINGTON - Drivers who are seeking to beat rising gas prices by buying hybrid vehicles could save more money if they're patient.

Starting in 2006, people who buy or lease hybrid vehicles - cars or sport utility vehicles powered by both gasoline and electric engines - can get tax credits of up to $3,400. The credit is a dollar-for-dollar reduction in what you owe in income taxes. It's included in the energy bill that President Bush signed into law Aug. 8.

Not all hybrids have been approved for the credit, and how much you'll get back depends on the efficiency of the car and when you buy it. In addition, a cap on how many hybrid purchases qualify and waiting lists for some hybrids mean you'll have to act fast.

Here's how it works. The Internal Revenue Service has approved seven hybrid vehicles for the tax credit: the Ford Escape, Toyota Highlander, Honda Accord, Honda Civic, Honda Insight, Lexus RX400h and Toyota Prius.

More may qualify as the IRS reviews new hybrids. Chevrolet, Nissan, Dodge and Saturn plan to release hybrids starting in 2007, according to Brad Berman, who runs a Web site with news about hybrid vehicles with the help of the University of Michigan (www.hybridcars.com).

"Generally assume that the vehicles that achieve better gains in fuel efficiency are the ones that are going to be more handsomely benefited by the tax incentives," Berman said.

To get the tax credit you'll have to wait to buy the vehicle until after Jan. 1. If you buy one of the first 60,000 qualifying vehicles that your automaker sells, or buy one in the first three months after the quarter in which that sales total is reached, you'll get the maximum rebate. After that, the tax credit starts to phase out. You can get in line now but you can't take delivery of the car before Jan. 1.

The IRS will determine later this year exactly how much of a tax credit you can claim for each hybrid model. The amount will be based on how much more fuel efficient the car is than a 2002 nonhybid in the same weight class. Efficiency will be based on the Environmental Protection Agency's estimate of savings over 120,000 miles.

The Toyota Prius - which the EPA rates the most fuel-efficient car on the market at 61 miles per gallon - will get you the biggest tax credit, $3,100, says the American Council for an Energy Efficient Economy, a Washington-based nonprofit group that advocates energy conservation. Therese Langer, the group's transportation program manager, said it was possible that a new hybrid or improvements in current ones could qualify for the full $3,400 rebate.

Jon Linkov, the auto editor for the consumer advocacy group Consumer Reports, notes that only some hybrids are designed to save gas. You'll recoup costs more quickly, he said, with the Prius, Honda Civic and Insight, and Ford Escape. Other cars, including hybrid models of the Honda Accord, Toyota Highlander and Lexus RX400h, are aimed at drivers who want performance more than fuel efficiency.

Here's how the difference works out: Ford's suggested retail price for the 2005 V6 Escape hybrid is $28,525, $2,980 more than the gasoline-powered V6 Escape. Linkov estimates, based on tests he performed and an assumed $3.00-per-gallon cost for gasoline, that you'd save $769 in fuel costs annually driving 15,000 miles per year. The estimated tax credit for the V6 Escape is $1,950. Using these figures, it would take about 16 months to recoup the hybrid's higher price.

Then there's the 2005 V6 Honda Accord hybrid, one of the performance-enhancing hybrids. It costs $30,140, compared with $26,850 for the Accord V6 gasoline engine. Using Linkov's formula, the savings aren't much. The fuel cost for the hybrid is only $156 less and the estimated tax credit just $650. So it would take more than 16 years to recoup this hybrid's higher price...

Let's not mince words: the tax breaks are subsidies to hybrid car purchasers. Now, who is to say that hybrid cars are worth their higher initial cost? When we're trying to balance efficiency, consumer preference and environment impact, free markets are the only solution. Unhindered consumers are the best determiners of what is "best," not a government that assumes (and asks us to accept) its own omniscience.

A year ago, the Green Car Congress criticized Ford's criticism of a California bill giving a special perk to hybrids. The bill proposed that lone drivers of hybrid cars be permitted to use carpool lanes; Gov. Schwarzenegger went on to sign it into law. Sen. Debra Bowen, in opposing the bill, said it would not "encourage a single person to buy a hybrid who wasn't going to buy one already." Actually I'd be surprised were that so. Some commuters (particularly in the Bay Area and L.A.) value their time so highly that minimizing their time in traffic is worth the expense of trading in their current vehicle and buying a hybrid.

Her other criticism is valid, that carpool lanes will become congested, but it's even deeper. That law does not fit the purpose, or even the spirit, of High Occupancy Vehicle lanes: to reduce road congestion and help reduce auto emissions (which in themselves are a questionable function of government, at least, the way government does things). Hybrids still burn gasoline, and less than regular cars, but it's nonetheless a marginal reduction in total auto emissions while giving a huge benefit to Toyota and other hybrid manufacturers.

Ford is actually correct in its criticism, and the GCC is wrong to blame Ford for not having produced hybrids. I should specifify that I do not defend Ford because they're an American company, but because they were correct to delay their own hybrid manufacturing. Hybrids are just not competitive overall, even with their long-term fuel savings, and sales figures show that they're hardly a dent in the market. Though their sales increased 81% in 2004 relative to 2003, that in itself is not significant when you consider only 46,000 hybrids were sold in 2003. Bankrate.com noted in April that JD Power & Associate's calculation was that 88,000 hybrids were sold in 2004, still accounting for only "0.52 percent of the total U.S. light-vehicle market."

Instead of resorting to industrial conspiracies about big oil and how automakers supposedly collude with them, let's look for a simple explanation as to why hybrids are uncompetitive. Simply, consumers already know that hybrids are not their most economical choice, and that's why they'll stick to traditional gasoline-only automobiles for the next while. In an unfettered free market, consumers know a great thing when they see it. CDs needed little more than a decade after introduction to become the dominant format for commercial music, and look at DVDs' dominance after only several years. On the other hand, the USA Today article predicts that "hybrids could make up 30 to 35% of the U.S. market by 2015 as long as automakers remain committed to producing them and market to people who are passionate about driving them."

So 15 years after their introduction, hybrids might not command a third of the market. They (so far) don't have enough merit -- intrinsically -- that consumers will pay a few thousand or several thousand dollars more for them. Higher gasoline prices do help hybrids sales, yes, but (so far) still not enough that hybrids are a profitable venture for Toyota and others. So, like so many American businesses before them that couldn't compete, they unleashed their lobbyists on any level of government that might help make hybrids artificially more competitive. Oh yes, like any good corporation does, Toyota has its lobbyists. Some do PR, like hosting Washington lawmakers, and others pursued Toyota's interests in the California bill. Note that the SFGate article said, "Pavley said Toyota lobbyists had no influence in how the bill was written and had pushed unsuccessfully for a lower gasoline mileage threshold to qualify for the decals." The "and" should have been "but."

I've said it before, but it's worth repeating: the fundamental problem isn't with the lobbyists, but that our federal government has assumed so much unconstitutional power that it sustains the special interest groups. Whether through "tax breaks" or direct subsidies, it's flatly immoral when government decides that something is better for you than an alternative. It may not deny you the freedom to choose, instead merely making it more expensive for you to choose what was otherwise your preference. That leads to why government "incentives" tend to be economically inefficient, because they prop up industries that couldn't otherwise compete.

What would Bastiat say? (I haven't asked that in a while, not since talking about the Kelo decision.) Bastiat would tell us to stop calling them "tax incentives" and start calling them "higher taxes on everyone else."