Tax Breaks for Hybrid Buyers

Amidst the cutting-edge Ferraris, Jaguars, and Lexus concept vehicles at the 2005 North American International Auto Show in Detroit in January was one particularly pricey concept that is a government creation: a federal tax gift to upper-class Americans buying fuel-efficient hybrid cars.

While Washington, D.C., played host to the presidential inauguration, 6,000 international journalists and nearly 1,000,000 spectators descended on America’s Motor City for a different kind of inauguration: the annual rollout of the auto industry’s newest products. One of the market’s hottest niches is for “green” vehicles like the Toyota Prius and the Honda Accord Hybrid — gasoline-electric hybrids marketed to socially-conscious buyers with six-figure incomes. In 2004, hybrid sales reached 80,000 units in the United States, mostly to “luxury-type vehicle owners, people who want to be first on their block with plasma screen TVs and all that,” says Ford spokesman Dan Bedore.

But unlike other low-volume niches, such as plasma TVs or high-performance sports cars, hybrid buyers will not be paying a premium for their products. In fact, they will be receiving a federal subsidy of $2,000 per car.

Billed by its congressional supporters as a way to seed new technology in the fight against global warming and oil dependence, the hybrid tax break has lined the pockets of some of the richest people in America.

For example, the Toyota Prius — America’s most popular hybrid, with 30,000 units sold last year — is typically bought by childless couples with an annual household income of $100,000, according to Toyota’s own demographic study. The car has become a status symbol among the Hollywood elite. Multimillionaire celebrities like Cameron Diaz, Leonardo DiCaprio, Larry David and Jack Black are all proud owners of the Prius and its $2,000 tax break. And this year, Toyota is offering its second hybrid vehicle through its luxury divison, Lexus. The Lexus E330 sports utility vehicle hybrid — already pre-sold to 11,000 buyers — is being gobbled up by hybrid highbrows making $130,000 per year on average.

With the Lexus SUV and other new hybrid offerings from Mercedes, Honda and Ford, hybrid sales are expected to more than double this year to 165,000 units in the United States. That means a total federal subsidy of some $330 million to upper-income customers.

Sage Eastman, press spokesman for the tax break’s congressional sponsor, Rep. Dave Camp from Midland, Mich., defends the policy: “Congress wants to encourage emerging technology that can have a lasting effect on the environment. Initially, the tax break may have been taken advantage of by wealthier individuals, but in the long run we’ll see a broader use as more cars are introduced into the market.”

Keith Ashdown, vice president for policy for the nonpartisan Taxpayers for Common Sense, however, is skeptical that the hybrid tax credit is serving its purpose: “You want tax breaks that alter consumer behavior. This tax break probably isn’t working because it’s putting money into the pockets of people who would buy this product in the first place.”

Even with the subsidy, however, auto companies are losing their shirts on hybrids.

Since gasoline-electric hybrids use two power sources — a combination of a gasoline engine and an electric motor — they are substantially more expensive than standard cars. Though hybrids typically sell at a sticker price of $3,500 more than comparable gasoline cars, manufacturers are not recouping their costs.

One indicator of hybrid technology’s expense came this December when General Motors and Chrysler announced a pooling of resources to develop their own hybrid vehicles. Says David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich.: “The sheer costs are horrendous. They’ll do a whole lot better with a partnership.”

The costs put manufacturers in a box. They cannot make money on hybrids, and yet their public relations value among hybrid supporters in the press, Hollywood and elsewhere means they cannot afford not to. Even General Motors’ product guru Bob Lutz, a hybrid skeptic, admits that GM’s decision not to get into the hybrid business was a mistake.

“The reason we missed the boat on hybrids is we business-cased it too much,” he recently told the Detroit Free Press. “We took this hard analytical look at it and said for that amount of investment to sell that quantity of vehicles where we lose money on every one is irresponsible vis-à-vis the shareholders. We failed to appreciate that Toyota basically treated it as an advertising expense. They said we need these to demonstrate our . . . concern for the environment, capture the imagination of the growing environmental movement in the U.S., and get all those East and West Coast intellectual opinion leaders, movie stars, etc., on our side, which they successfully did. So even if they lose money on it, it’s cheap at twice the price.”

Whether or not tax credits should be going to well-off car buyers, the hybrid subsidy is but a foot in the door of federal efforts to fundamentally alter the auto market. And despite the blue state concentration of hybrid buyers, it is an effort that transcends party lines.

Congressman Camp, for example, is a self-described conservative Republican. He sponsored the hybrid tax break, his spokesman Eastman explains, because, “Congress is saying now is the time to transition to sources that are eco-friendly and lower our dependence on foreign oil.”

While the U.S. government has firmly rejected participation in the Kyoto Treaty limiting greenhouse gases, automakers are under tremendous pressure to reduce their carbon dioxide emissions. Their business is a global one, and European and Asian governments have already moved to put caps on carbon dioxide emissions.

Even in the United States, automakers are facing new regulations in California and Northeast states to limit greenhouse emissions through mileage standards, regulations that could fundamentally change what consumers would be allowed to buy. Add to this the very real threat of tobacco-like global warming lawsuits against automakers, and a transportation future in which the government subsidizes industry to make only “earth-friendly” vehicles looks quite plausible.

It is a future that is being actively promoted by big auto players like GM and Ford — chief advocates for Camp’s tax credits not only for hybrids, but ultimately for cars powered by “renewable resources” like hydrogen.

In a somber, almost religious, news conference held on the Detroit auto show’s opening day, GM CEO Richard Wagoner dropped all pretence that cars are about individuality and fun. He sketched a “guilt-free driving” future where “government and industry will have to solve together” the challenges for transitioning to a hydrogen transportation system.

“This should excite you for what it means to society. Whatever motivates you — global warming or the sustainable use of resources — the hydrogen economy is coming,” he said, upon introducing the Sequel, a hydrogen-fueled concept. “This is a bold step toward the reinvention of the automobile. This is our moonshot.”

And like NASA’s moonshot, this ambitious government-industry re-invention of the auto won’t be cheap. Obviously, its costs will dwarf those of the hybrid subsidy.

To the car enthusiasts making their annual pilgrimage to Detroit, the auto show is still a celebration of individual transportation. But listen closely to the industry’s observers and you perceive an undertone that cars are increasingly seen as a threat to be harnessed for societal goals. If, as players as diverse as GM’s Wagoner, Cameron Diaz, and Rep. Camp seem to suggest, the goal of automobiles is no longer to offer a good consumer product, but to save the planet, who will be able to say no?

Henry Payne is a Detroit free-lance writer and editorial cartoonist for The Detroit News. Earlier versions of this piece have appeared in the Weekly Standard Online and the National Review Online. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.