California's Mysterious War on Gasoline Cars

NEW YORK ( TheStreet) -- California will soon have the country's highest state income tax rate at 13.3% and red tape for almost every kind of business is strangling profitability.

The high level of government spending, record pay and retirement benefits for government bureaucrats make Greece look conservative and California is spinning in the direction of the biggest bankruptcy of all time. Unemployment is among the country's highest, despite the world's best farm land, Hollywood and Silicon Valley.

With this trainwreck of an economic calamity, why do people voluntarily still choose to live in California? The answer is the unbeatable fresh air, the flawless climate, the best weather in the world. I call this "air/climate/weather."

In California you don't need to be worth $10 million to feel rich -- you only need a park bench and the open sky. There is no money in the world that can buy this air/climate/weather. You could be Donald Trump, but if you're living in New York, you're poorer than the poorest Californian when it comes to the air/climate/weather experience.

Some will argue that California's signature industries -- Hollywood and Silicon Valley -- are the main attractions for living in California. This explanation, however, doesn't really answer the question of why those industries in turn are in California to begin with. If California didn't have the country's -- and the world's -- best air/climate/weather, chances are that those industries would do what their employees would do: swiftly locate themselves to places with lower taxes, less red tape and no looming state bankruptcy.

With this as a background, please consider California's obsession to eliminate most regular gasoline cars from the sales column. According to the state government, over the next decade or so, the sale of regular gasoline cars will be curtailed in favor of "zero emissions" vehicles, such as electric cars and hydrogen fuel cell cars.

In order to achieve this goal, the California government is forcing auto makers to produce and sell increasing quantities of currently primarily electric cars. These quantities have been modest until recently, but over the next couple of years, these required sales of various classes of electric cars ramps up materially: 1.5 million of them by 2025.

This poses an obvious market problem: Imagine that the government mandated that for each restaurant McDonald's opens, it needs to also open five vegan restaurants where only tofu and rice cakes are served. Furthermore, for every beef burger sold, they would also need to sell five rice cake and tofu salads. How would you like that? How would McDonald's like that?

In California today, the people who are deciding what cars will be sold are no longer buyers and sellers on the free market, but government bureaucrats who dictate the sales mix.

The question nobody seems to be asking is the underlying logic of the government's plan to force people into buying cars they don't want. The California government says it is doing this to improve the air/climate/weather. But the air/climate/weather is where California excels! Basically, you don't need to fix a problem that doesn't exist to begin with.

If there were the slightest problem with the air/climate/weather in California that needed to be fixed, believe me, people would be long gone from this state. There sure isn't any other reason to live in California.

This is not to say that I in any way dislike electric cars. On the contrary, I'm probably one of the most ardent electric car fans in the world. There are plenty of good reasons to buy an electric car. For example:

1. Electric cars are quiet. This is an environmental benefit if I ever saw (heard) one. Noise pollution is real and obvious to everyone who isn't legally deaf.

2. Electric cars drive well. They are smoother, powerful and allow for mostly one-pedal driving. Basically, it's a premium drive experience.

3. Electric cars may have lower maintenance expense. Fewer moving parts mean less breakdowns and cost to service, as there are no timing belts, no spark plugs, no oil changes and so forth.

In other words, I highly recommend electric cars -- whether the pure ones, or the extended-range hybrids such as GM's ( GM) Chevrolet Volt, Ford ( F) C-Max Energi or Toyota ( TM) Prius Plug-In. I think that with time, they are likely to take over the marketplace on the merits -- quiet, smooth and low maintenance performance.

However, pure electric cars also have a number of drawbacks causing many consumers to wait. Basically, the technology -- batteries -- is expensive in relation to the range and recharging time. People are also cautious with respect to performance in extreme temperatures and battery longevity.

The extended-range hybrids eliminate essentially all drawbacks except for cost. The added weight and the space the battery/electric components occupy also are minus points.

Therefore, my prediction is that in a free market the sale of pure EVs as well as plug-in hybrids will likely increase over time. New technology takes time, even if people like it. During its first year or two, the iPhone was not a raging success either -- and automobile technology typically takes much longer than computing technology to be adopted by consumers.

Take Toyota, for example. It is now selling the excellent Prius Plug-In as a "lighter" alternative to the Chevrolet Volt and Ford C-Max Energi. But that was not enough for California's regulatory whip!

Toyota also had to start selling pure EVs. It contracted with Tesla to engineer a special all-electric version of the now-outgoing 2012 model RAV4, and sell 2,600 units in California 2012-14. This is a fantastic automobile, and I highly recommend affluent California citizens get one.

However, if you consider the development cost for this low-volume production run, it would suggest that Toyota is losing a lot of money on each of these cars, currently priced around $50,000 pre-state and federal tax incentives.

In addition, Toyota engineered the Scion iQ EV, which is a marvel of a tiny city car, but in the end realized that it would not sell, even in California. Only 90 were built. Given the cost to engineer this fine automobile, I don't even dare speculate about the amount Toyota had to write off.

The list goes on: Fiat and Honda are also selling or leasing electric cars for California, probably at a big loss per car. Only because someone thinks that California's biggest problem is its air/climate/weather. It is so totally counter-intuitive that it gives me a headache.

The California bureaucrats would point to some chart showing that the air quality in Los Angeles is sometimes bad. Really? If so, why do people volunteer to live there? Why do people keep visiting? And why should alleged bad air/climate/weather in LA impact someone's car purchase if you live somewhere else in California and you will never drive to LA?

Bottom line: The attempt by California's government bureaucrats to force people into buying certain types of cars because of an alleged problem with California's air/climate/weather is totally counterintuitive. It also raises costs for the auto makers, who in the end of course have to pass these costs to the consumer.

The message to Sacramento should be: Stop trying to fix a problem that so obviously doesn't exist.

At the time of publication, the author had no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

If you liked this article you might like

Why Self-Driving Cars Are Still the Future Even After Uber Tragedy

Why Self-Driving Cars Are Still the Future Even After Uber Tragedy

Goldman Sachs Has a Sinister View on Tesla's Next Two Years

Goldman Sachs Has a Sinister View on Tesla's Next Two Years

Qualcomm Ex-Chairman's Leveraged Buyout Bid a Real Long Shot

Qualcomm Ex-Chairman's Leveraged Buyout Bid a Real Long Shot

Why Does Tesla Have Such a Hard Time Making Cars?

Why Does Tesla Have Such a Hard Time Making Cars?

Ford Revs Higher After Rare 'Double Upgrade' From Morgan Stanley

Ford Revs Higher After Rare 'Double Upgrade' From Morgan Stanley