OPINION: Gasoline prices not policies affect car purchase

Michael Hicks, Ph.D., director Bureau of Business Research, Ball State University

After a year or so of writing this column, I've at least learned two things. First, if you write about taxes or environmental policy, you are going to be busy reading angry e-mails. Second, almost none of those angry e-mails are from folks who have actually inconvenienced themselves to perform research on tax or environmental policy. I know these two things and yet cannot resist writing about environmental policy and taxes.

A few years ago I was heavily into environmental policy research. It was all pretty technical economics work, the kind with upside down Greek letters and second derivatives. It really puts a toddler to sleep at bedtime.

Among the things produced by these efforts was an outline of what became the largest state environmental tax plan, the economics for the first clean coal grant (a whopping $108 million), an economic analysis of a carbon capture program called Futuregen and estimates of the cost of regulating mountaintop mining. All fun stuff designed to rob an economist of his friends on both sides of any issue.

Nestled in all that research was an estimate evaluating the relative contribution of prices, income, taxes and public policy on the adoption of alternative fuel vehicles in each state. This was really interesting work because states had enacted very different policies and levied very different tax rates. During the period examined gas prices also fluctuated a great deal (but not quite as much as we've seen in recent years).

I'll spare you the upside Greek letter version (though it is still useful for making that restless toddler a bit drowsy). What I found was pretty straightforward. Adoption of alternative fuel vehicles was influenced a wee bit by gas taxes. The higher the state's gas taxes, the higher the adoption rate.

I also found that the more urban and richer the population, the higher the rate of vehicle adoption in each state. Again, no mystery here since I was looking at pre-2005 data when fuel costs weren't too bad, but the cost of vehicles was pretty high. I also found that state and federal tax incentives played a very small role in adoption rates of alternative fuel vehicles. That's a problem because it suggests that even the relatively generous tax incentives were having a very mild effect on ownership of these autos.

Here's the big insight of the paper. What mattered most was the price of fuels, not other policies. High alternative fuel costs kept ownership down, while high gas costs propelled the adoption of alternative fueled vehicles.

Today this doesn't seem like a particularly clever insight (there goes my Nobel Prize nomination). New car buyers struggle to find alternative fuel vehicles on lots, and gas prices are clearly to blame for the quick buy-up. What the research does tell us is that public policy has limitations. All the policy efforts to induce consumers to buy the fuel efficient vehicles had less influence than a quarter price increase per gallon of gas.