Matthew Kandrach – President, CASES
June 19, 2019
Extending the federal tax credit for buyers of electric and plug-in hybrid vehicles would do more harm than good.
The Driving America Forward Act, co-authored by Sen. Debbie Stabenow, D-Michigan, would create an unlevel playing field as well as exacerbate an inequitable policy of using taxpayer money to subsidize the purchase of electric vehicles (EVs) by mainly well-to-do people.
The sponsors of the proposed legislation make three assumptions: that EV technology needs further taxpayer-funded incentives to make it more price competitive with conventional vehicles, that the credit has increased the number of EVs in use and that investing in research and technology for better EV vehicles is a good way to help our country and the world deal with climate change.
All three assumptions are false.
When Congress enacted legislation establishing credits for plug-in EVs in 2008, it was believed that the credits would encourage acceptance of EV technology by making it more price competitive with gasoline vehicles. The thinking was that with more consumers wanting plug-in EVs, more manufacturers would make the vehicles commercially available, and EVs would become integrated in the vehicle market.
Today, nearly every major automobile company in the world produces EVs. At the end of last year, about 5 million EVs were in service worldwide, with 760,000 on America’s roads and highways. Almost half of the world’s EV fleet is in China. Still, EVs constitute a miniscule share (less than one-half of 1%) of a global car fleet of 1.2 billion. By 2040, 160 million EVs are projected to be in service worldwide, representing about 8 percent of a global car fleet of 2 billion.
The upshot of this is that the gasoline automobile will continue to power the overwhelming majority of personal vehicles for the near future. With auto manufacturers already investing billions into improving fuel efficiency of cars and light trucks, including the SUVs that are increasingly preferred by American consumers, the paltry returns on EV subsidies make no sense for consumers or taxpayers.
Evidence shows that a number of factors are associated with EV sales, and that not all are tied to the tax credit. In a study of the tax credit, the Congressional Research Service found that purchases were motivated by other reasons, such as HOV-lane access or a desire to own a high-end vehicle that happens to be electric. For these buyers, “tax credits are a windfall gain,” the study said. “They reduce federal revenue but do not increase plug-in EV sales.”
The very idea of extending the tax credit is absurd. The congressional Joint Committee on Taxation estimates that under current law, tax expenditures for the EV tax credit will be $7.5 billion between 2018 and 2022, when it’s due to be phased out. Extending the credit, as Stabenow’s bill would do, would inflate the estimated tax expenditure borne by the U.S. taxpayer. An Ernst & Young study estimates that the Stabenow measure would cost $15.7 billion over 10 years.
More to the point, EV tax credits are disproportionately claimed by well-heeled buyers. According to the Joint Committee on Taxation, in 2016, 57,066 individual taxpayers claimed $375 million in EV tax credits. Most of the tax credits (78%) were issued to EV buyers with adjusted gross incomes of $100,000 or more — which is nearly double Michigan’s median household income — and those buyers received an even higher proportion (83%) of the amount of credits that were issued. About 7% of the credits were claimed by millionaires.
Subsidizing wealthy Americans to purchase vehicles is unfair to normal people. The effect of extending the tax credit would be like a regressive sales tax, with the burden felt most heavily by people on modest incomes.
