One side effect of collecting taxes is the subsequent incentive a particular tax may generate. As taxes make a particular item or action more expensive, people tend to buy or do less of that thing. On the flip side, people will do more of something if it is subsidized in order to capture additional income. In this way, taxes and subsidies become tools for shaping human behavior.
The power of tax and subsidy incentives is not lost on lawmakers. In fact, many of the laws passed each year are attempts to change the way you behave. New York City, for example, charges an extra tax on junk food. There are thousands of better ways to collect revenue in New York City, but this particular tax thinks of revenue as a secondary benefit. The main goal is to encourage people to eat healthy, reducing obesity and creating some more space on the subways.
Similarly, the government subsidizes farmers for growing certain crops and for not using a particular percentage of their acreage. They do this to intentionally distort the natural behavior of farmers. These subsidies keep the price of food high (so small farms can survive) and allow the government to decide which crops best benefit the country (corn is especially favored).
Taxes on things like cigarettes mean fewer people are smoking and smokers are smoking less. Subsidies like tax returns for having children mean there are more people with more children than if there were no subsidy.
Which brings us to two federal subsidies with particular importance in Arizona. The Cash for Clunkers program gave people up to $4500 toward a five-year lease on a new car if they traded in their old one. The goal was to get people that normally wouldn’t be looking for a long lease on a new car to do just that, boosting a struggling automotive industry and taking thousands of high-emissions cars of the road.
It worked. About 690,000 cars were exchanged with the fuel-efficient Toyota Corolla coming out on top as the most popular new car in the program. The taxpayer cost of providing this incentive was about $3 billion.
But how are the people who participated in the program feeling one year later? Many of these people were not in the market for a car in the first place, and many more used the $4500 incentive to get into a nicer car than they normally would have considered. The subsidy did what it was supposed to do: change human behavior. The government is pleased with the success of the subsidy, but what about the humans whose behavior was changed?
A survey released last week reported that many cash for clunkers participants in Arizona are not happy with their purchases. No doubt their decision profited them in the short-term, but buyers remorse has set in as they have found themselves upside down in cars they can’t afford with four years left on their leases. Participants also reported feeling stuck in cars that, however efficient, do not accommodate their lifestyle or their changing family needs.
Certainly some of the reasons people don’t like their cash for clunkers purchase are their own fault. No one could hold President Obama, or even their car salesman, responsible for their failure to consider they may be having more children or the fact that Corollas don’t do well on muddy mountain trails. But what, if anything, can we learn from the cash for clunkers program about the housing subsidies that expired in April?
The answer is ‘not much’. But we can glimpse a little into the future.
One year from now, Arizona will likely have a powerful case of homebuyers remorse. Home values are predicted to continue dropping through next year, making thousands of new homebuyers almost instantly upside down in their 30-year mortgages. Participants in the $8,000 incentive will report being stuck in homes that, however good a deal at the time, may not accommodate for growing families or changing needs. The saving grace for mortgages over car leases will be that home owners will be able to recover the money spent on their home when they sell, even if they have to outlast an economic recovery to do so.
Taxes and subsidies change human behavior. They get us to do stuff we wouldn’t otherwise do. Despite these examples of buyers remorse, there are times when taxes and subsidies correct market failures and actually make us better off. But most of the time, there’s a reason we wouldn’t otherwise do what taxes and subsidies try to make us do. For those considering taking advantage of tax and subsidy incentive programs, considering the future as well as the present may prevent the buyers remorse common to societies with high government incentives.