Ann Arbor, Michigan – Automakers do “just enough” to improve the fuel economy of their vehicles in order to lower their tax rates and increase rebates imposed by the Canadian and U.S. governments, according to a new study by two U.S. professors. The professors said that automakers have fine-tuned their fuel economy to qualify for more favourable treatment for more than 30 years.
The study was released by Joel Slemrod, professor of business economics at the University of Michigan’s Ross School of Business, and James Sallee, assistant professor at the University of Chicago’s Harris School of Public Policy. The two say that in response to federal policies to boost gas mileage, manufacturers have changed vehicle weights, improved the rolling resistance of tires, and added aerodynamic features to push their fuel economy rates past the government-mandated thresholds.
In the study, Slemrod and Sallee focus on “car notches” in government policies, the small trigger points in the numerical values of fuel economy such as the difference between 22.5 mpg and 22.4 mpg, that lead to large changes in tax liability or the amount of a subsidy.
“In spite of having a bad reputation among economists, policy notches are ubiquitous,” said Slemrod. “They induce ‘actors’ to change their behaviour just enough to be situated on the beneficial side of a notch. In the case of car notches, a vehicle manufacturer may have an incentive to marginally re-engineer its cars so as to just qualify for a more advantageous policy category.”
The professors studied the responses to the U.S. gas guzzler tax of 1978, which penalizes cars with low fuel economy, and the Canadian “feebate” program of 2007, which offered tax credits and rebates to encourage the purchase of more fuel-efficient vehicles. In the U.S., a car with an 18.5 mpg rating is subject to a $2,100 tax, while a car with an 18.4 mpg rating is subject to $2,600, creating a tax increase of $500 through a decrease of just 0.1 mpg. Under the Canadian program, cars that get 43 mpg, for example, qualified for a $2,000 rebate, while those getting 42 mpg received a $1,500 rebate, while vehicles getting less than 18 mpg are taxed up to $4,000.
Using data from the Canadian government, the U.S. Environmental Protection Agency, the Corporate Average Fuel Economy and the Internal Revenue Service, the researchers found that automakers produce and sell a significant number of “extra” vehicles with fuel economy ratings just on the tax-favourable side of a notch than otherwise would be expected, and more than those cars just below a notch that are subject to a higher tax. Since automakers are required to round off mpg values on fuel economy labels for consumers, this results in a “presentation notch” at every 0.5 mpg, permitting automakers to round up in their calculation of fuel economy, the researchers said.
The study also said that automakers can boost fuel economy by producing lighter-weight vehicles of the same model, or recalibrating the engine, using low-friction lubricants, modifying the tires or making small aerodynamic changes, all of which are perfectly legal.
“Overall, we provide several pieces of evidence showing that automakers respond to notches in fuel economy policy by precisely manipulating fuel economy ratings so as to just qualify for more favourable treatment,” Slemrod said. “And future fuel economy policies are likely to increase the importance of notches.”