Policy and Economics on Collision Course With Electric Vehicles

This month, all eyes in Washington are on Congress and tax reform. While any potential tax overhaul affects broad swaths of the economy, the eventual legislation that emerges after the conference committee will have an outsized importance for certain sectors – such as the electric vehicle market.

A proposal in the House version of the Tax Cuts and Jobs Act would eliminate the federal tax credit, which is currently worth as much as $7,500 per vehicle, for the purchase of an electric vehicle. It is unknown whether this proposal will survive final negotiations and be enacted into law, but if it does the impact could be significant.

What influences consumers when ultimately deciding whether to buy an alternative or gasoline powered vehicle? This is the question to consider when trying to predict how alternative fuel vehicles will perform on dealer lots in the future — and how policy makers’ decisions will also impact this performance. In short, economics plays a significant role in influencing a consumer’s decision.

The new Fuels Institute report, Consumers and Alternative Fuels 2017, finds a strong disconnect between what potential car buyers say they will do and how they actually behave when it comes to purchasing non-gasoline powered, alternative fuel vehicles including electric, hybrid and diesel vehicles. Regarding electric vehicles in particular, 51 percent of potential car buyers said that they were very or somewhat likely to consider an all-electric vehicle for their next purchase, up from 48 percent in 2016.

However, this interest has not yet been reflected in actual sales at dealer lots. Electric vehicles represented only 0.45 percent of all light-duty vehicles sold in 2016, roughly 80,000 units.

In looking at why there is a such a strong disconnect between stated consumer interest in alternative fuel vehicles and actual consumer behavior, the survey determined that factors influencing the gap between consumer interest and actual purchases included low gas prices, lack of battery charging infrastructure, range anxiety and battery replacement costs.

Each of these factors will play a crucial role in how quickly and whether the significant gap between stated consumer interest for alternative fuel vehicles and actual sales of these vehicles will narrow.

This brings us back to tax reform and how our policy makers could shape the alternative fuel market for years to come by deciding to repeal the electric vehicle tax credit, or leave it in place. How Congress ultimately proceeds will have a significant impact on the electric vehicle market.

We’ve already seen a case study on how a repeal of an electric vehicle tax credit can impact the market. In 2015, the state of Georgia repealed a $5,000 electric vehicle tax credit and simultaneously imposed a $200 registration fee on electric vehicles. Electric vehicle sales in Georgia have declined by 80 percent — sales dropped approximately 90 percent the year after the tax and fee were changed — since repeal of the tax credit. This makes sense when we consider that 87 percent of consumers who said they would not consider an electric vehicle said the vehicles were too expensive.

As interest in alternative fuel vehicles continues to grow, sales of electric, hybrid and diesel-powered vehicles could increase. But the reality of this is that growth is dependent on many variables, including the decisions of policy makers on Capitol Hill. While economic considerations are not the only factor influencing consumers’ decisions when purchasing a vehicle, they remain a significant factor. In fact, 81 percent of consumers said that vehicle cost was among the most influential attributes when purchasing a vehicle. Policy makers should keep this in mind when considering the impact their decisions may have on the alternative fuel vehicle market.

John Eichberger is executive director of the 
Fuels Institute, a nonprofit research-oriented think tank that evaluates market issues related to vehicles and the fuels that power them.

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