Carmakers have been doing just enough to improve fuel economy of vehicles in order to lower tax rates and increase rebates for more than 30 years.
That’s the verdict of Joel Slemrod, a professor of business economics at the University of Michigan’s Ross School of Business, as well as his colleague James Sallee, an assistant professor at the University of Chicago’s Harris School of Public Policy.
Together they find that manufacturers have changed vehicle weights, improved tyre rolling resistance and added aerodynamic features to push fuel economy rates past government thresholds. In particular, the professors focus on “car notches” – this is where small changes in behaviour lead to significant changes in tax liability or the level of a subsidy. They could be tiny changes in numerical values – such as the difference between 20.4mpg and 20.5mpg meaning a change in tax liability or subsidy.
In particular they highlighted the US Gas Guzzler Tax of 1978 where the amount of tax is a notched schedule in fuel economy – meaning vehicles with small rating differences could be subject to different taxes. A car with an 18.5mpg rating was taxed at $2,100; while a car with an 18.4mpg rating met tax at $2,600. Similarly, under the Canadian feebate programme, cars with 43mpg qualify for a $2,000 rebate whereas cars that achieve 42mpg only get a $1,500 rebate.
As automakers are required to round off fuel economy values there is a notch up achieved at every 0.5mpg. They believe the paper perfectly illustrates that significantly more vehicles are produced and bought just on the policy beneficial side of these notches.
Sallee and Slemrod outline that future fuel economy policies will only increase the importance of notches and that they may have administrative or salience benefits but to be warranted these benefits must outweigh inefficiency costs.
