How Congress' Hybrid Subsidy Misses The Mark

Congress has a troubling tendency to dictate the means rather than the goal to be achieved. In doing so, Congress believes that it knows best to accomplish a desired outcome. This arrogance almost always results in sub-optimization. Instead of allowing the creativity of the marketplace to figure out the best way to achieve the ultimate goal, Congress prescribes the means.

The tax credit for hybrid vehicles is a great example. Congress offers a tax credit of up to $3,150 for hybrid vehicles. Hybrids combine an electric motor along with a scaled down combustion engine to achieve greater gas mileage.

But is promoting hybrid vehicles the right goal? Of course not. The ultimate goal is to reduce the amount of transportation fuel that the country uses, both to reduce our dependence on foreign oil and to reduce C02 emissions.

Since hybrids use less fuel, how does subsidizing this particular technology sub-optimize the results? Because selling more hybrids does not necessarily reduce the countries fleet mileage. A Chevy Tahoe hybrid gets 22 MPG. Why should a buyer of such a vehicle get a credit when a person who buys a conventionally powered Toyota Corolla which gets far higher gas mileage (27/35) does not?

If the goal truly is to reduce gasoline usage, why does Congress not have a rebate based on the best MPG instead of a particular technology? Why not have a tiered subsidy with the most rewards for people that buy the highest MPG vehicles, regardless of technology?

Compounding the problems with Congress' central planning model is that subsidies for hybrids increases demand, which elevates the price the price in the market. Manufacturers also build at least part of the subsidies into the prices of the vehicles. Just try to get a hybrid at list price. Congress also saw fit to put a cap on how many of each make and model hybrid can receive a credit. For example, the Toyota Prius is currently "capped out".

The kicker is that many of the people that will buy a hybrid, costing more than a traditionally powered vehicle, will be caught buy the Alternative Minimum Tax (AMT). For those swept up in the AMT dragnet, the hybrid tax credit is disallowed.