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Opinion: Don't extend electric vehicle tax credit

Gary Wolfram

The federal government has for several years provided incentives for the production of electric vehicles. The largest incentive is the tax credit for the purchase or lease of a new plug-in electric car enacted in 2008, and amended in the American Recovery and Reinvestment Act of 2009.

The amount of the credit depends upon the battery capacity of the vehicle and the amount of the individual purchaser's tax liability. The maximum credit is $7,500 and is non-refundable, meaning that the credit can only be used to reduce your tax liability. So if your tax liability were $2,000, for example, the amount of your credit would be limited to $2,000.

GM announced Wednesday it is collaborating with EVgo, ChargePoint and Greenlots to aggregated data from each of the three EV charging networks for use in an updated version of the myChevrolet app.

The tax credit is available for purchase or lease from a manufacturer until the manufacturer sells 200,000 vehicles. Once the manufacturer reaches that mark the credit is phased out over a one-year period. The tax credits for Tesla and Chevrolet electric vehicles are being phased out. Nissan and Ford are more than halfway to the phase-out.

As a consequence, there has been interest in extending the tax credit. This is ill-advised for a number of reasons, including whether the government should be encouraging electric vehicle sales to begin with. The credit has not been very successful in expanding the production of electric vehicles, and the tax credit is primarily a subsidy for wealthy purchasers.

There is some evidence electric vehicle use does reduce greenhouse emissions compared to conventional autos. However, even if true, it is clear that the use of electric vehicles has a very small effect on total carbon emissions simply because such vehicles are a very small fraction of  the market.

Jonathan Lesser of Continental Resources found that "the net reduction in carbon dioxide emissions between 2018 and 2050 from the use of electric vehicles would be only about one-half of 1 percent of total forecast U.S. energy-related carbon emissions."

Looking at the data, the tax credit has been particularly ineffective in expanding electric vehicle sales. In his 2011 State of the Union address, President Barack Obama said that with more research and incentives the U.S. would have more than 1 million electric vehicles by 2015. In October of 2018 total electric vehicle sales hit the 1 million mark. The number of cars registered in the U.S. in 2018 was 98.35 million.

So if all the electric vehicles sold were still on the road in 2018, they would make up about 1 percent of all U.S. cars. In 2018, light vehicle sales in the U.S. were 17,274,250 units, and of these only 361,307 were plug-in electric vehicles that would be eligible for the tax credit. It is possible that many of these sales would have occurred in the absence of the credit.

Because the tax credit is not available to people without a tax liability, it is not surprising that the vast majority of people who receive the credit are wealthy. The Pacific Research Institute recently found that 79 percent of the tax credits are taken by people who make over $100,000 per year. A 2015 report from the Energy Institute at Haas found that Americans in the top 20 percent of income earners received about 90 percent of the federal tax credits for electric vehicles.

There is little doubt that nearly all the beneficiaries of the tax credit are beyond middle income.

Certainly one can question whether it is good public policy to subsidize the vehicle purchases of the upper crust of American society.

A final point is that electric vehicles do not pay for the road infrastructure, since they do not run on gasoline or diesel and thus do not contribute the gasoline tax that goes to support national, state and local roads.

Given the country’s infrastructure needs it is not clear that subsidizing the purchase of vehicles that will use the roads while not paying for them is a grand idea. In addition, electric vehicle require charging infrastructure that will need to be built out.

Given the inability of the federal tax credit to stimulate electric vehicle sales, the marginal effect of electric vehicles on emissions, the fact that the primary beneficiaries of the tax credit are the top tier of the income distribution and the avoidance of the source of revenue to finance roads, we should allow the tax credit to expire for those manufacturers that have hit the 200,000 target, and consider ending the credit altogether.

Gary Wolfram is the William Simon Professor of Economics and Public Policy at Hillsdale College.