The federal EV tax credit has outlived its purpose and is now a blatant example of government overreach and economic inequity.
Originally introduced in 2008 to stimulate a nascent market, and then renewed and expanded in 2022 as part of the Inflation Reduction Act, this credit remains what it has been from the beginning: an ineffective subsidy that primarily benefits the rich. Congress should put an end to it.
On the fiscal side, we are facing a $2 trillion budget deficit and it is growing. According to the Treasury, the electric vehicle credits in the Inflation Reduction Act, which can be up to $7,500 on certain new electric vehicles and up to $4,000 on certain previously owned electric vehicles, represent $112 billion in loss of income. But based on recent years, there are are reasons to believe the cost will be much higher.
Additionally, the EV credits are part of an industrial policy package of energy tax credits, “Buy American” mandates and requirements under the IRA that will cost more than 1 billion dollars over 10 years, deepening the deficit hole in which we find ourselves.
Beyond the price burdening taxpayers, the credit is unfair to the vast majority, who, being worse off than EV buyers, drive relatively affordable gasoline-powered vehicles and reap no benefits. financial credit. Studies repeatedly show that most of these credits go to higher-income people, making the credit a tax cut for the wealthy. For example, the Congressional Research Service study noted: “For vehicles purchased in 2021, taxpayers with adjusted gross income (AGI) over $100,000 represented 22% of all filers and received 84% of the credit benefits.”
The IRA tax credit's income limit ($150,000 for single filers, $300,000 for joint filers) and refundability may tilt some benefits toward low-income taxpayers. However, electric vehicles have higher purchase prices than comparable gasoline vehicles, even with tax credits, and installing home charging equipment is easier for owners, who tend to have higher incomes, than for tenants. As a result, EV tax credits will likely continue to be a boondoggle for higher-income taxpayers.
In fact, a recent study According to five economists, “75% of the EV subsidies claimed under the IRA have gone to consumers who would have purchased an EV anyway.” According to their calculations, each car sold thanks to the incentive (approximately 25% of the total number of vehicles sold) amounted to a cost to taxpayers of $32,000. Credit's inability to attract those who would prefer to buy a gasoline vehicle is a clear sign of its failure, explaining the need to impose even more authoritarian measures, such as mandates related to electric vehicles.
Making matters worse is the fact that electric vehicle sales have stagnated in recent months. Despite taxpayer help, sales stay stuck at 7% market, strongly suggesting that while tax credits may change the timing of EV purchases, they are not increasing demand.
For those who believe the cost and disparity in our tax code is worth it because we must fight climate change, I have news for you.
First, the environmental benefits of credit are unclear. Electric vehicles are not emissions-free when considering the carbon footprint of battery production and electricity generation. Furthermore, electric vehicles mainly replace purchase of newer gas vehicles, which pollute less than older vehicles that remain on the roads. Combined with the fact that many tax credit recipients would have purchased an electric vehicle anyway, there is unlikely to be much environmental benefit for that money.
The cost of the government choosing winners compounds this problem. There is little reason to believe that the technological path government officials prefer is optimal, and the danger is that tax credits are creating market distortions that crowd out better solutions.
By artificially propping up EV manufacturers and directing consumers toward a specific technology, other, perhaps better, technologies may be thwarted. Hybrids, plug-in hybrids, hydrogen fuel cell cars, alternative fuels or other emerging innovations are penalized despite their important role in addressing environmental and energy challenges. Each deserves a level playing field in determining which can offer more effective environmental benefits, lower costs, or both.
However, instead of encouraging open competition and letting the best solutions reveal themselves or allowing different technologies to meet different customer needs, the tax credit creates winners and losers based on political priorities.
Finally, the tax credits were initially sold by Congressional sponsors as a means “to help move these products from the initial stage of production… to the mass production stage, where economies of scale will reduce costs and credit will no longer be necessary.” We have already passed that stage.
While still small, the EV market has matured and no longer needs these crutches. Even Elon Musk, CEO of Tesla Motors, the leader in electric vehicle sales in the US. with 2 of 3 cars sold and the largest beneficiary of the credits – says that should end. In a Wall Street Journal article, Toyota's Jack Hollis also called at the end of costly and inefficient tax credits.
It is time for this policy to disappear. The federal EV tax credit is a regressive and inefficient program that benefits the wealthy at the expense of average Americans. Eliminating it would restore fairness, reduce government interference in the market, and, through genuine competition, allow resources to be directed toward initiatives that allow as many people as possible to purchase cleaner vehicles.
There are much more effective ways to design policies to address climate change. It is best to free up capital to fund as many green and innovative projects as possible by reducing capital gains taxes and renewing the ability to immediately deduct 100% of capital investments. Projects such as solar parks, wind turbines and grid infrastructure require huge upfront capital investments. Without full accounting, these costs must be depreciated over many years, reducing the present value of the tax benefits. Additionally, better cash flows in the early years make it easier to obtain financing. There is also a question of time. The transition to clean energy requires rapid deployment of new technologies. Full accounting encourages companies to accelerate investments rather than delay them. The federal government should also raise permit barriers that bureaucrats have erected and that make building and innovating more difficult than it should be.
Subsidizing high-end car buyers is a poor strategy for achieving meaningful environmental progress. But we know how to do it better.
Rugy Veronica He is a senior fellow at the Mercatus Center at George Mason University.
