Saturday, January 14, 2006

The Peoria Journal Star published a short article on 1/13/06, page B1 concerning a proposal to be made by Governor Blagojevich to give a $500 sales tax deduction to individuals who purchase select high mileage vehicles.  The estimate is that this deduction would be used for about 15,000 cars a year.  This would result in a loss of sales tax revenue of about $7.5 million a year.  An advisor to the Governor is quoted as saying “The governor wants to give incentives to people who make wiser choices.”

This certainly seems like a good idea to help save the amount of fuel consumed in the United States.  Perhaps, however, the Governor hasn’t considered some of the ramifications of this both for Illinois and the nation.  First, it may be some what presumptuous of the Governor to decide for us what is a wiser choice for us personally and what is not a wiser choice for us.  If it is a wiser choice, do we really need a $500 incentive to reach that decision?  If we have already decided to buy such a car, we will be receiving a “windfall profit” that wasn’t necessary to offer.  If the $500 induces us to buy that which we wouldn’t have otherwise purchased, then the government is using our tax money to induce us to make a purchase we wouldn’t have made otherwise.

The article lists seven cars that presently would qualify under the program.  Six of those seven cars are produced by foreign automobile manufacturers.  Consequently, if the incentive induces people to purchase what they otherwise would not purchase, this action could help to increase our balance of trade problems with more of our money going to overseas manufacturers.  Also, if the incentive is of benefit, then the number of cars purchased because of it should be expected to increase in future years.  Therefore, that $7.5 million of revenue lost will also increase if the incentive program is successful in encouraging consumers to purchase fuel-efficient vehicles.  $7.5 million in revenues lost the first year, who knows how much thereafter if the incentive works.  

Furthermore, the $7.5 million is not the only government revenue that probably will be lost.  Take this possible example.  A consumer drives 15,000 miles a year.  Instead of purchasing a vehicle that gets 25 miles to the gallon, he uses the incentive to buy a vehicle that gets 35 miles to the gallon.  If he continues to drive 15,000 miles a year, he will save 171.43 gallons of fuel each year.  The motor fuel tax for Illinois is $.19 a gallon.  (It’s a little higher for diesel.)  In this example, he will also save $32.57 in motor fuel tax each year.  If he saves that much, it means the State loses that much.  Multiple $32.57 by 15,000 cars and the State loses about $488,500 a year in motor fuel tax.  If more cars are purchased because of the incentive, they lose more motor vehicle tax.

We already know that the State and local governments have budget problems.  The State has already decided to not pay money into State pension funds so that it can be spent for other budgetary items.  Should the Governor be proposing a new incentive program that will take money away from state and local governments?  Is this the best way to spend our tax dollars?  Is this an election year maneuver to improve his chances to be reelected and to give him possible national exposure?  


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