Tuesday, August 23, 2005

Planes, Trains and Automobiles, Part III

Here’s another post on the topic of transportation subsidies. As noted previously, we provide direct federal support to some forms of transportation, including passenger rail services. (Some of my colleagues gasped at the $45 per passenger figure I mentioned in my last post.) This support involves an appropriation from Congress, which shows up in our federal budget. However, we also give other forms of support in the form of tax credits or other benefits, which also function like a subsidy.

Tax credits for hybrid vehicles make the $45 figure cited above look like chump change. A recent piece in the BNA Daily Tax Report (by Sheila Schimpf, August 17, 2005) outlines the tax credits in the legislation signed by President Bush on August 8, which will take effect in the 2006 tax year. These credits allow purchasers of hybrid vehicles to reduce their federal income tax burden by up to $3400 per vehicle. Not all vehicles get the same credit – it depends on the fuel economy saved by adopting the hybrid technology. For example, the Ford Escape is estimated to receive a credit of only $1950, as it does not have as good a record on mileage.

Current law effective until the end of this year allows purchasers of “clean fuel” vehicles, including hybrids, to obtain a deduction of $2000. Of course, a deduction is not as sweet as a credit, as the value of the deduction depends on the marginal tax rate of the taxpayer. For example, assuming a tax rate of 25%, that $2000 deduction is worth only $500. Details on this deduction can be found at www.fueleconomy.gov.

Despite effusive praise for these policies from some circles, I’m not convinced that this is an effective way to spend taxpayer money. The recent experience with high gasoline prices has made drivers more sensitive to fuel costs, and this has caused changed behavior. Some drive less. Others decide to substitute the purchase of gasoline for other consumption so that they can keep driving the same amount. Those are individual choices that result in satisfaction to the user, without government interference.

If an individual chooses to invest in a vehicle that will save gasoline, that person is making a choice, too. The payback on that choice has not been very good: the price of hybrid vehicles over their conventional counterparts typically represents an investment that requires several years to be returned in fuel savings. This payback period may reduce as gasoline prices increase, but most hybrid vehicle owners accept what may be a long payout because they want to make a statement, such as being environmentally sensitive. I applaud them for making that choice, but I fail to see why we should subsidize it through tax credits.

I recently bought a small, fuel-efficient, conventional car – a Pontiac Vibe. It gets around 30 mpg in daily commuting – about what many hybrids get. I didn’t get a tax credit, though, even though I am also being environmentally friendly. Nor do I think I deserve one. However, I am thinking of buying a hybrid, and if I do, I’ll gladly accept the capital cost reduction from my friendly Government. I also will wait until next year, when I can get a credit rather than a meager deduction.

Edward A. Morse

1 comment:

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