Hybrid Tax Credits: Public Policy v. Corporate Welfare

GM is already lobbying hard for a generous $7,000 tax credit for its new Volt. In case you're keeping score, 7-large is about twice the size of the tax credit initially offered to Prius buyers. GM's angle: the tax credit should be based on battery capacity and the amount of petroleum the car doesn't consume. The more batteries you have on board and the less gas you guzzle, the more Uncle Sam should knock off your tax bill.

It's hard to know what the reception in Washington will be to GM's suggestion. John McCain has already said that he's comfortable with a tax break of 5-large. Barack Obama has said that he likes the $7,000 consumer tax incentive, and also favors tax incentives and low-interest loans to the automakers for some serious R&D and retooling.

WIth a $7,000 incentive, GM could effectively price the Volt into the $30,000 range, making it accessible to more consumers. It would also help GM patch the earlier $20,000 figure it had tossed out relative to the Volt. Honda meanwhile says it will release a $19,000 Prius-killer in April 2009, which spy shots have shown to look surprisingly like the style-challenged Prius.

If the purpose of the tax credit is to help GM underwrite the Volt, then by all means, get it on the books. If, on the other hand, the tax credit is designed to support the greater public policy issue of reducing dependence upon petroleum, then the über-tax credit merely declares the battery to be the de facto winner in the alternative energy sweepstakes, and ignores the potential (if you'll pardon the pun) of other exciting power technologies like super-capacitors and fuel cells.

The tax credit should be based on how well a particular vehicle avoids the gas pump, rather than how many batteries it uses. Given that the US doesn't exactly have much in the way of battery production capacity, encouraging the use of batteries simply trades dependence on foreign oil for dependence on foreign batteries. Further, it isn't clear that the infrastructure in the US and elsewhere can support a sudden surge in the number of EVs and PHEVs that are hooked to the nations electrical grids.

In the end, the battery may not emerge as the best power technology for vehicles. Tax credits shouldn't be used to favor one technology over another. Instead, they should be used to assist consumers in moving away from dirty, inefficient vehicles that consume a lot of gasoline and foul the air.

Photo Credit: Alessandro Paiva