Honestly, Who Doesn’t Love Free Money?: Lessons From “Dollars for Dishwashers” in Iowa

March 3, 2010

The Tax Update Blog has a quick post on Iowa’s recent “Dollars for Dishwashers” program. This subsidy was aimed at boosting sales of energy efficient appliances. Tax Update had this to say:

Iowa burned through its allotment of fun bux to encourage purchases of “energy efficient appliances in only a few hours yesterday. Our government supergeniuses, expecting the pile of our money to last two weeks, were again caught off guard again by the shocking phenomenon that people will line up for free money. Imagine that.

Iowa officials credited it to a “spirited and proactive response to energy efficiency,” but I think the free money had something to do with it. It should not be surprising that people will react to such giveaways. Remember Cash for Clunkers? Nor should it be surprising that sales will increase when the government provides a subsidy for a product.

But just because it results in an increase in sales does not make it a justifiable program. It is likely that a large portion of the benefit from this rebate program went to consumers who would have made the purchase anyway. Often overlooked in the evaluation of temporary tax breaks and subsidy programs is the difference between an overall increase in purchases and a shift in the timing of purchases. Energy efficient appliances sales may have increased during the subsidy program, but I would be willing to bet that sales were lower before the program and will be lower for some period after the program.

Another example of this occurs with sales tax holidays, when consumers shift the timing of their purchases to coincide with the holiday. Sure, there are huge crowds during the holidays, but studies have shown that overall sales for the year are not affected. Short-sighted politicians see only that holiday weekend but miss the larger effect.

This sort of faulty thinking permeates many tax policy discussions. For instance, another related question that is often overlooked (and difficult to answer) is what would have happened in the absence of a particular government action. See, for example, the focus on job creation tax credits and incentives at both the federal and state levels. It is impossible to keep such benefits from flowing to businesses that would have hired anyway. But lawmakers will inevitably count these as “created” jobs.

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