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The Tax Cuts and Jobs Act of 2017 eliminated or capped many of the tax carve outs and exemptions that had plagued our tax code, but many remain. One tax credit that survived the chopping block provides a subsidy of up to $7,500 to electric car buyers.
The electric vehicle credit distorts the market, providing arbitrary benefits to one type of car over others instead of letting market competition drive consumer decisions. And taxpayers will foot the bill, to the tune of $7.5 billion from 2018 to 2022.
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The EV credit was originally created a decade ago as a temporary provision designed to help a fledgling industry. Under current law, the credit gradually phases out for a manufacturer once it sells 200,000 EVs. Tesla and General Motors have already hit the 200,000 vehicle limit; their subsidies are set to expire in 2020.
As several additional companies approach the 200,000-vehicle cap, Congress is negotiating a package of “tax extender” legislation that could include removing the cap and extending the credit through at least 2022. But proponents of an extension are really attempting to create a permanent subsidy to electric car makers, since there’s little reason to think lawmakers would let the credit expire in 2022 if it isn’t allowed to die this year.
Lifting the cap would have negative economic consequences that far outweigh consumers’ financial savings. Not only would federal taxpayers face greater burdens, but consumers would see their electricity bills increase by $19 per household as utilities shift the cost of EV infrastructure to ratepayers, according to a recent study by NERA Economic Consulting.
Overall, eliminating the manufacturers’ cap would reduce personal income in all U.S. households by $95 billion between 2020 and 2035. That’s works out to about $610 per household.
The NERA study also echoes the results of previous research in finding that extending the EV tax credit would have a negligible effect on fossil fuel consumption, reducing gasoline demand by less than 1 percent by 2035. Carbon emissions and climate change would not be reduced in any significant way. Similarly, the International Energy Agency and the Manhattan Institute have both estimated that EVs will reduce global CO2 emissions by less 1 percent in 2040.
The EV credit is also highly regressive, funneling money from ordinary taxpayers to the wealthy. In 2014, nearly 80 percent of EV credits went to households making at least $100,000 per year or higher, and about 20 percent benefited households earning between $50,000 and $100,000. In other words, less than 1 percent of these tax credits were received by households making less than $50,000. That’s not surprising, considering Tesla buyers have an average household income of $293,200.
With so much government backing, one would think the EV market would be thriving, but it’s not. In 2017, the 199,826 plug-in EVs sold in the United States made up barely 1 percent of the automobile market. It’s not hard to see why.
Even after considering the cost of fuel and special tax treatment, EVs are about $5,000 more expensive to own and operate, compared to conventional cars. They’re also less convenient, with shorter driving ranges and long recharging times.
The billions of dollars spent on EV credits over the last decade have been ineffective and costly to low-income taxpayers. No wonder about two-thirds of voters oppose these subsidies. These credits shouldn’t be extended; they should be repealed.
Liam Sigaud works on economic policy and research for the American Consumer Institute, a nonprofit educational and research organization.
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