Professors: Stimulate Sales With Taxes Instead Of Subsidies

To stimulate the electrified vehicle market, the White House has developed a mixture of rebates and subsidies.

But this may not be the most effective tactic, according to a pair of business management professors.

Anton Ovchinnikov, associate professor at the Queen’s School of Business in Kingston, Ontario, Canada, and Gal Raz, associate professor at the University of Virginia Darden School of Business laid out their idea in the Washington Post.

They also recently published their in-depth analysis in the journal IEEE Transactions on Engineering Management.

“Designing incentive schemes for green technology adoption requires a comprehensive understanding of how firms and consumers will respond to them,” Ovchinnikov and Raz said.

Under the current solution, a $7,500 tax rebate was offered to consumers buying plug-in and electric vehicles. To support President Obama’s goal of reach 1 million electrified vehicles by the end of the year, legislators were also asked to change this end-of-the-year tax credit into a rebate that could be applied at the time of sale.

In addition, programs were created to offer $2 billion in subsidies directly to manufacturers.

SEE ALSO: White House Seeking Expanded $10,000 Alternative Vehicle Rebate

The problem, wrote the professors, is that subsidies generated extra risk for the government while creating a vague plan for the automakers.

“A subsidy affects manufacturers directly, by reducing costs,” said Ovchinnikov and Raz.

“Subsidies alone could be inefficient because they may cause governments to take a disproportionate risk in overproducing electric vehicles.

“For automakers such as GM … it was unclear how much capacity to dedicate to production and how to price the Volt for maximum profitability.”

The business professors’ proposal still includes subsidies and rebates, but tweaks the model slightly. Instead of offering a subsidy to manufactures, Ovchinnikov and Raz said negative subsidy – essentially a tax – removes unnecessary risk from the government and saves tax dollars.

“The more cars are sold, the higher the cost of the … program,” Ovchinnikov and Raz said about the current subsidies.

Even though the approach could better promote the electrified vehicle market, Ovchinnikov and Raz recognized that passing a tax on manufactures would be “difficult to execute from a political standpoint.”

If a tax couldn’t be implemented, using only a consumer rebate would be almost as beneficial.

“The optimal approach would be to combine a rebate with a negative subsidy; i.e. an additional tax on manufacturers,” said Ovchinnikov and Raz.

But without that, “the rebate-only incentive that is provided by the government for electric vehicles (such as Chevy Volt), while structurally suboptimal, seems efficient and much easier to implement politically.”