Gas prices aren’t the only reason for more hybrid sales

Between 2000 and 2006, U.S. hybrid sales increased from 3,000 to 250,000 vehicles. Why? The rise in gas prices? Government incentives like income tax credits and deductions, state sales tax waivers, single-passenger access to HOV lanes, and waivers of fees for registration, emissions testing, excise and parking? Or changing consumer tastes and preferences for a clean environment and an energy security policy?

In a working paper, Kelly Sims Gallagher and Erich Muehlegger, of Harvard’s Kennedy School, try to untie this knot by estimating the effect of public policy incentives, the market incentive of higher gas prices, and social and environmental preferences on hybrid sales. They calculate that 54 percent of hybrid sales are driven by these three factors. (Given the expansiveness of those three factors the Nudge blog thinks this number seems low – or is at least speculative evidence of the power of a good car salesman!)

Comparing the three factors, tax incentives have the least effect, accounting for only six percent of sales. Interestingly, rising gas prices were responsible for a lower percentage of sales than social preferences, 27 to 33 percent respectively.

We find that gasoline prices affect hybrid vehicle adoption decisions, although the effect operates almost entirely through adoption of hybrids with high fuel economy. (ie. Civic, Prius, Insight, Camry and Escape)

However, it’s hard to extrapolate from this paper that the recent surge in hybrid sales is being driven more by social preferences than by $4-per-gallon gasoline. After all, gas was still less than $2.75-per-gallon near the end of 2006.

Policymakers should pay particular attention to the argument that the type of tax incentive offered is as important as the value of that incentive.

Sales tax incentives, which are immediate and easy to obtain, have a much greater effect on the demand for hybrid vehicles than income tax incentives which are delayed and likely more difficult to apply for and obtain…Even though sales tax incentives tend to be less generous than income tax credits, we find that the mean sales tax waiver (value $1,077) increases demand to a greater degree than the mean income tax credit (value $2,011)…Conditional on value, we find that sales tax waivers are associated (with) a seven-fold greater increase in hybrid sales than income tax credits.

Actual sales tax waivers and income tax credits vary widely from state to state, and federal credits for vehicles vary widely. Click here to see if your state offers a superior immediate refund instead of a delayed tax credit. Last year, our home state of Illinois chose the immediate refund (a $1,000 rebate) payable at the time of purchase. But with a program budget of $2 million, the program was suspended just this month after reaching its limit of 2,000 beneficiaries.


One Response to “Gas prices aren’t the only reason for more hybrid sales”

  1. George Wirtz Says:

    Is there a Federal income or sales tax credit now in effect for the purchase of a Toyota Prius Hybrid? I live in Wisconsin, what is available here? I plan to purchase this car either in Dec. ’08 or Jan ’09. Thanks.

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