Honda Hybrid Case Tax Incentives

Honda Hybrid Case

Tax incentives for the purchasing of hybrids were until very recently quite popular with both the federal and many state governments, as the reduced fuel consumption had a number of positive political and economic effects. Less spending on fuel results in more discretionary income for consumers that can go towards other products; there is a reduction in the dependence of the United States on foreign oil sources for its energy need; and there are also environmental benefits in the reduction in the amount of greenhouse gases (primarily carbon dioxide) as well as other air pollutants emitted when cars are made more fuel efficient. Honda's hybrid version of its popular Civic model has remained a strong seller during these years of tax incentives; this study attempts to determine if governments should continue these tax incentives.

Methods and Assumptions

The method for assessing whether or not a tax credit was needed or advisable as a consumer incentive for purchasing a hybrid vehicle involved a cost and benefit calculation for the major stakeholders involved in the purchase of a hybrid and that would be affected by the provision of a tax reduction as an incentive. It was assumed that these stakeholders were the buyer of the hybrid, the state government, the federal government, and the general public. It was further assumed that factors affecting the buyer would be the price differential between hybrids and other vehicles and the expected cost savings based on reduced fuel consumption. State government would be affected by increased sales tax payments and reduced sales tax on fuel.

The federal government would also incur a loss on reduced fuel consumption, which would equal part of the savings to the buyer just as the increased sales tax revenue enjoyed by the state is part of the costs to the buyer. It is assumed that these "financial transfers" have no bearing on the societal benefits and costs felt by the general public; environmental benefits and a reduced dependence on foreign energy sources are all that the public truly derives from a hybrid purchase, it is assumed. With these definition in place, the calculation of the costs and benefits to each of the four identified stakeholders was possible in a concrete manner, allowing for a purely quantitative comparison of stakeholder outcomes. From an analysis of several different scenarios and the outcomes that were the results of calculation, a determination as to the advisability of tax incentives for hybrid buyers was reached.

Results

The results of the cost and benefit comparisons were fairly straightforward. Regardless of the cost of fuel and the number of miles driven, the buyer of a hybrid consistently posts a net loss. Even assuming fuel costs of four-and-a-half dollars per gallon (the most expensive fuel scenario modeled) and an annual mileage of twenty-thousand miles (the highest mileage scenario modeled), the buyer is still at a net loss of nearly eighteen-hundred dollars. Combining the state benefit in increased sales tax and the public benefit from environmental benefits creates a surplus of less than two hundred dollars, and the federal losses from taxes on fuel are over three hundred dollars in and of themselves.