Do Hybrid Sales Fall After the Tax Credits End? ~ Hybrid Car Review
Hybrid Car Review: Do Hybrid Sales Fall After the Tax Credits End?

Monday, March 09, 2009

Do Hybrid Sales Fall After the Tax Credits End?

It seems to me that some people are trying to revise the history of hybrid cars to suit their own purposes.  It's recently become more common for me to see claims that with the end of the federal tax credits on hybrids has led to a general decline in hybrid car sales.

This is my rebuttal.  It seems clear to me that people were more interested in buying hybrid cars at the beginning because of the tax credit.  It certainly helped alleviate some concerns on the additional price people have to pay to buy a car with two different engines.

But, I'm not convinced the end of the tax credits has led to the end of interest in hybrid cars.  It seems to me that the hybrid car industry has gone beyond the early phase of sales and has gone mainstream.  There's no doubt in my mind the federal tax credits being put in place for plug-in hybrids will also spur interest in the plug-in hybrid industry.

Despite still being a small percentage of the overall marketplace, hybrid cars are a hit with customers and with car companies.  Most of the major car companies have either a hybrid car on the road today, or plan on putting one on the road in the next two years.

Back Story on the Federal Tax Credits for Hybrid Cars
The federal tax credits for hybrid cars were established back in January of 2006 to help facilitate the sales of hybrid cars. They were a new and expensive technology designed to help increase fuel efficiency and help the nation use less oil.

Toyota and Honda, two Japanese car companies, had a clear advantage to making hybrid cars, which worried federal law makers and US automakers. Why should they get an advantage when they're the one selling the most hybrids? So, lawmakers introduced a 60,000 sale limit. After the 60,000th hybrid was sold, the tax credit would be phased out gradually.

At the end of the quarter after a car maker goes over the limit, the tax credit available to those who buy a hybrid from them is cut in half. Two quarters after that, the tax credit is halved again (25% of the original) and two quarters after that, the federal credit goes to 0.

At the beginning of 2006, Toyota was already selling over 10,000 hybrids a month, which means it didn't take them long to hit the 60,000 limit. The tax credit phase out period began for Toyota just nine months from the start on October 1st of 2006. Honda took longer, beginning the phase out period on January 1st, 2008.

So, the question is, did the federal tax credit ending slow down hybrid car sales?  If you take a look at the following figures, I'm guessing you will feel the same way I do. 

Toyota Federal Tax Credit Phase Out on Hybrid Cars

First, let's look at Toyota.  At the start of 2004, the only hybrid Toyota had on sale was the Prius. Take a look at the Toyota sales chart.  The top (blue) line is all hybrid sales for Toyota.  The red line is all other hybrids from Toyota and Lexus, excluding the Prius.  I thought this might bring something else to the graph, since the Prius is the number one hybrid on the road, accounting for half of all hybrid car sales in the US.

After the tax credit began in 2006, you see a general upswing in sales, but some of that is being affected by the introduction of other hybrids in the Toyota line-up.  There was also an increase in production of the Prius, following the introduction of the Camry Hybrid production in Georgetown in the Fall of 2006.  This freed up some production in Japan, where the Prius is built.  Although it's not clear here, Toyota was selling every hybrid they made.  There were waiting lists in 2006 and 2007 and the gas prices of early 2008 kept those waiting lists intact right up until the recession hit.

As you can see, there was usually a spike in sales the month before the next tax credit phase out.  Toyota would rush to get the hybrids built and on their way to the customers the month before, resulting in fewer hybrids being available in the beginning month of the next phase.

Also, it's clear that the other hybrids in Toyota's lineup, whether a Toyota or a Lexus, seem to be very stable, if seasonal.  Each time a new model was introduced, the numbers seemed to increase.  Especially at the beginning, irregardless of what the model was and how 'hybrid' or fuel efficient it was, the appetite was very high for hybrid technology.  This was especially true for Honda (see below).

So, out of curiosity, if I hadn't told you where the phase out periods began and ended in the figure, could you have told me?  I don't think so.  There's clearly no long term affect from the tax credits ending for Toyota.  Gas prices and production numbers have complete control of Toyota hybrid sales.

Honda Federal Tax Credit Phase Out on Hybrid Cars

Honda is a different story, but the end result is, I believe, the same.  But it is a harder argument to make, given when the tax credit completely phased out for Honda.

With fewer models (the Insight and Civic Hybrid were already on Sale in January of 2004, and the Accord Hybrid was introduced in December of 2005), the sales mix is more stable although it's also seasonal.  Honda never pushed to produce more hybrids over the time period, and once other models (not from Honda) came on market, the popularity of the Accord Hybrid nosedived.  It's clear that the Accord Hybrid, when there were few other options for hybrid buyers, was popular.  Since the Accord was designed for performance values, not fuel efficiency, hybrid buyers started staying away.  In fact, both the low production two-seater Insight and Accord Hybrid were retired before the tax credit phase out period began for Honda.

After the phase out period began for Honda, the gas crisis dominated hybrid car sales.  That pushed hybrid Civic sales up.  At the end of the first phase out period, Honda saw a clear dip in January, although I would argue once again that Honda had pushed out more in the prior months to help more customers receive their tax credit.

It's also hard to know because of the seasonal affects.  In December of 2007, Toyota sold over 24 thousand hybrids.  In January, 2008, they sold over 18 thousand.  That's a 23% decrease.    Honda dropped 46% (3,373 units in December, 1,793 units in January) over the same two months, which indicates something else was happening (the tax credit phase out beginning), but it's clear some of that drop is explained by other factors.

After that, the picture is clearly being affected by the run in up in oil and gas prices.  And after gas prices fell, the picture gets really muddy since the recession hit.

It's possible the tax credits ending for Honda has affected the number of hybrids they could sell, but really... it's impossible to tease that out from the general sales decline in the auto industry.  While I'm not sure this is a valid analysis, we could compare to the decline from Toyota hybrids to those from Honda over January and February.  Toyota was down 36.6% in January and 35.4% in February.  Honda looks better over the same two months, since their sales decline 39.9% in January and only 26.4% in February.   But those numbers are comparing the drop from the previous January and February, when there was a big decline in hybrid sales at Honda, possible in part due to the beginning of the phase out period.

Customers at Toyota seem to have been oblivious to the phase out of the federal tax credits for Toyota hybrids.  There is no clear indication of hybrid sales being affected by the loss of the tax credits at Toyota and Lexus.  Honda, however, may be a different story.

But in the end, it's clear that sales were going strong for both companies, right up until the recession took a huge chunk out of both companies sales.  High gas prices in 2007 and 2008 pushed hybrid car sales up, irregardless of the tax credit.  The recession and low gas price seem to have pushed sales down.  There may also be a downward pressure from the upcoming introduction of the new generation Prius, the new Insight and the Ford Fusion Hybrid and Mercury Milan Hybrid.  It's clear from 'chatter' on the web, some people are holding off on purchasing other hybrids until these new hybrids come out in the next couple of months.

In the end, there's no denying there has been a decline in hybrid car sales over the past six months or so.  This has almost everything to do with the recession and, to a lesser degree, lower gas prices.  While sales are down, hybrid cars actually make up more of the market than they did before, as sales have declined less for hybrids than they have for other cars.

So, what do you think?  Has the federal tax credit for hybrids being phased out had an adverse affect on the industry?  Or has the industry gone beyond?

Update: It seems I'm not the only one who feels the tax credits phasing out have not affected hybrid sales.  Check out hybrid car blog for comments on my analysis.

Get Four Free Price Quotes From Yahoo! Autos Hybrid Research and Pricing at


Dahcredyns said...

This summer, when gas prices were high, people were paying huge markups on many hybrids, especially the Toyota Prius. The federal tax credit was meaningless.

Even since, with gas prices down and the third gen prius on the way, prius sales are still pretty good - almost recession defying.

For cars like the Prius, ultimately, tax credits don't mean much.

I don't think they'll matter for the Insight either.

Of course, if you tried to sell 1 million hybrids in America per year starting by 2012, I think tax credits would be required.

Dahcredyns said...

Here's the link to the post I made on Hybridcarblog based on your post.

Obviously you are an analyst with "too much time" on your hands. LOL. Great graph!

Mike said...

I'm not sure that's true. I bet they could sell more, assuming the economy turns around. The pressure on sales last year proved they weren't producing enough to go around. If more models like the Insight and Prius (big enough for most, fuel efficiency a high priority, cost is not cheap but not ridiculous), I think they could already be selling a lot more hybrids.

They just need to build them.

Post a Comment

Comments posted on Hybrid Car Review will be moderated. Please avoid dropping links just for the sake of links. The comment will be deleted shortly after. Keep comments on topic and non-abusive. Thanks!

Automotive Parts

E-Bay Motors


  © Link to Privacy Policy

Back to TOP