Thursday, September 21, 2006

See Your Toyota Dealer: Hybrid Credits Phasing Down

Yesterday the IRS announced that Toyota has reached the sales target of 60,000 hybrid vehicles, which triggers a reduction of the credit for hybrid fuel vehicles allowable to eligible taxpayers. (See IR 2006-145, and Notice 2006-78 (forthcoming in a couple weeks) for further details.) Effective on October 1, 2006, Toyota hybrid vehicles are eligible only for 50 percent of the allowable credit, instead of the full credit. The reduced credit amounts range from $1575 for the Prius to $775 for the Lexus GS 450h. The popular Camry and the Highlander SUV gets only $1300, while the Lexus RX400H gets $1100. Those figures drop by half on or after April 1, 2007.

What about other hybrid vehicles? Well, they are not so popular, so until they reach their sales goal, they get the full credit as an additional incentive to purchase them. What do you think about this, Comrades?

It seems our government wanted to incentivize purchases of these vehicles. While all manufacturers had access to the same target incentive (amounts of which varied based on improvement in fuel economy – hence the lower benefit for the big Lexus above) this allowed a level playing field among competitors. (However, as discussed in previous blogs, it also distorted a purchase decision that, in many cases, did not make economic sense. With gas now selling at $2.11 (10% ethanol blend) in my neighborhood, I would guess it makes even less economic sense.)

However, once the market had 60,000 vehicles from each manufacturer, the credits were scheduled to reduce. Unfortunately, they are not reduced for everyone, just for the successful manufacturer. Those automakers who make less popular products, who thus could not compete as effectively in the marketplace, still get their incentives. Thus, we are effectively handicapping this sporting match, much like giving the weaker players several strokes and letting them compete with Tiger Woods.

I didn’t like this credit at the start, and now I really don’t like the credit. Though I am glad it will phase out eventually, it should phase out for all manufacturers at the same time. In fact, I find it hard to justify why we are discriminating against Toyota, the successful competitor in this case.



Shawn Deluhery said...

Hi Ed,

You said consumers have distorted economic incentives because the gas price is low. Gas was over $3.00 about three weeks ago. Don't you think it will go right back up after the November elections?

It makes economic sense because the U.S. is starting to become more conscious of pollution. Are you saying controlling pollution does not make economic sense? How can this be?

The goal in economics is to make life better, is it not? If you disagree, please read any economic textbook or economic philosophy book. Even Adam Smith would agree with this statement.

Toyota should have their hybrid subsidies reduced as they no longer require them. Let's not pretend the free market is fair because it isn't. If I am right, you’ve written much on the farming industry. These regions in the U.S. are heavily subsidized by taxpayers, which are mostly living in blue states. So, red states are subsidized by blue states. Yet, red state voters “believe” in the sanctification of the free market.

I'm not sure if I agree with your sports analogy. Football, basketball, and hockey have stringent team price caps in order to make the game competitive. Baseball does not. It seems obvious that baseball is not as competitive of a sport from a team prospective as football, basketball, or hockey. Ah, price floors and ceilings actually increase the competitive environment.

You don't like the credit because it puts a damper in your free market theory. Under the free market, Toyota will continue to increase sales thereby causing dollars to go out of American's wallets over to Japan. If trends hold, this logically would cause lost jobs, lost wages, lost demand, as well as currency valuation changes if not carefully planned.

To liberals, these credits enhance opportunities for those who were not provided opportunities in the free market system. GM and Ford are great companies because they employ a massive amount of people, while giving them great benefits.

Ed Morse said...

Shawn, Those philosophy and economics books you mentioned have really given you some insights.

First, I am sure glad we have elections so the vast conspiracy will lower those gas prices once in a while. Maybe we should have elections more often, eh?

And I did not realize that any pollution control we can enact makes "economic sense".regardless of the cost of doing it. Silly me, I had always thought that "economic sense" involved some kind of calculus about costs and benefits.

Did you know we could stop auto pollution entirely by shutting off all cars? Or for maybe $1 million a copy, some engineers will build you a solar car that doesn't give off toxic emissions. (Those batteries, may be a problem, though.)

That sounds like a great way to spend money. Everyone who really cares about the environment should do both of these things and "lead the way" for the rest of us.

Of course, that may mean that they don't have money left for food, clothing, and shelter -- or education. But I think we have the education part covered: Perhaps you can loan them those philosophy and economics books you mentioned?


Shawn said...

Hi Ed,

Can you explain why the gas prices have decreased by 54 cents a gallon on average over the last six weeks at the pumps?

Ed Morse said...

Hi, Shawn. Two words: supply and demand. Oil prices are dropping, gasoline supplies are growing, the summer driving season is over, and there is a lot of inventory out there looking for someone to burn it. As you may know, Dr. Goss, Dr. Eric Thompsen of UNL, and I worked on a study of this issue for the Nebraska AG, which was released last January. We found market forces to be working, and no vast conspiracy.

I'm sorry if my tone was a little harsh in my last post - it was late and I was tired. I always welcome honest dialogue. Best regards.