A majority of Americans believe that the economy is rigged in favor of powerful interests. They have good reason for believing so, as special interests routinely exploit an activist government to benefit themselves at the expense of the broader public. The recent introduction of bipartisan legislation to ensure that the electric vehicle (EV) tax credit lives on well passed its current expiration date thus comes as little surprise but is nevertheless disheartening.
Under present law, the tax credit for the purchases of a manufacturer’s electric vehicles begins phasing down once that manufacturer reaches 200,000 in total sales. Tesla and GM have reached that cap already, which has motivated much of the new lobbying on the issue. The new bill would bump the cap up to 400,000 and very likely presage additional extensions down the road.
EV tax credits were established as a “temporary” measure “to help get these products over the initial stage of production … to the mass production stage, where economies of scale will drive costs down and the credit will no longer be necessary,” according to the 2007 floor statement delivered by Sen. Orrin Hatch on behalf of the bipartisan group, including then-Sen. Barack Obama, as it introduced the tax credit as it exists today.
By any objective measure, we have progressed well beyond the “initial stage of production” for electric vehicles and reached the point where “the credit will no longer be necessary.” And yet, as so often happens, the “temporary” measure is threatening to become all but permanent.
There’s a reason this problem is so common. Once a financial benefit is established, it creates a constituency willing to engage an army of lobbyists or rain campaign contributions onto legislators willing to do their bidding in order to ensure the handout’s preservation.
But what about the interests of taxpayers? Are the costs of EV tax credits justified by some benefit to the broader public interest?
One common claim is that EV tax credits are necessary in order to protect the environment. A new paper from economists Benjamin Leard, Shanjun Li and Jianwei Xing provides two reasons this is not the case.
First, they show that EV purchases primarily replace newer, relatively fuel-efficient gasoline vehicles, as opposed to pollution-spewing old clunkers. Second, they find that 70% of the credits go to households that would have purchased an EV anyway. The tax credit, in other words, is not significantly altering behavior and what changes it does induce provide minimal environmental benefit.
To make matters worse, the EV tax credit transfers wealth from low- and middle-income workers to the wealthy. An analysis of IRS data by the Pacific Research Institute shows that just 1% of the tax credits went to those making $50,000 or less. On the other hand, almost 80% went to households making more than $100,000 and more than half went to those making in excess of $200,000.
Justifying such a regressive transfer ought to require an extremely compelling public interest, and the EV tax credit clearly fails on that account. It provides benefits only to a wealthy minority and corporate special interests. The latter also creates a distortion in the market that reduces overall economic welfare.
We can say one positive thing about the EV tax credit: Its creators at least had enough foresight to ensure that it would eventually wind down on its own. Today’s legislators need to demonstrate enough respect for taxpayers to allow that process to unfold without interference.