The federal tax credit intended to boost electric vehicle (EV) purchases has long outlived its usefulness and has become a prime example of government overreach and economic disparity.
Initially rolled out in 2008 to kickstart a budding industry, the credit was extended and widened under the 2022 Inflation Reduction Act. From the onset, it largely served as an ineffective subsidy favoring affluent buyers, a reason why its abolishment by Congress is overdue.
Economically speaking, we are grappling with a ballooning $2-trillion budget deficit. As noted by the Treasury, the EV credits within the Inflation Reduction Act—a hefty $7,500 for certain new EVs and up to $4,000 for pre-owned ones—account for $112 billion in foregone revenue. Given past trends, the actual cost might soar far higher.
Moreover, these EV incentives are embedded within a broader policy of energy tax credits, mandates, and “buy American” directives that could surpass $1 trillion over a decade, consequently worsening our fiscal woes.
For taxpayers, the credit is inherently unjust, as it mostly benefits those purchasing expensive EVs, while the average individual—who often drives more affordable, gasoline-powered vehicles—sees no direct advantage. Research consistently highlights that these credits often favor higher-income earners. A Congressional Research Service analysis found that in 2021, although taxpayers with an adjusted gross income above $100,000 comprised just 22% of all filers, they secured a whopping 84% of the credit benefits.
While the Inflation Reduction Act sets an income cap ($150,000 for single filers, $300,000 for joint filers) and aims to make the credit refundable, it scarcely shifts the dynamic in favor of low-income taxpayers. EVs are generally pricier than similar gas vehicles, even with the credit, and home charging setups are more accessible to homeowners, typically wealthier than renters. Thus, EV tax credits continue to advantage higher-income individuals disproportionately.
Notably, a recent study by five economists indicates that 75% of EV subsidies under this act have gone to buyers who would have opted for an electric car regardless. Their calculations show that every additional vehicle sold due to these incentives cost taxpayers around $32,000. The credit’s failure to sway those interested in traditional gas vehicles is evident, prompting discussions about stricter mandates on EV sales.
Further complicating the situation is the stagnation in EV sales over recent months. Despite financial incentives, the market share lingers at just 7%, implying that while credits might alter when a purchase occurs, they don’t bolster overall demand.
To those arguing that tax code imbalances are a necessary trade to tackle climate change, there is a reality check.
Firstly, the ecological advantages of such credits are ambiguous. EVs, when accounting for the carbon output involved in battery production and electricity consumption, are not emissions-free. Also, EVs typically replace newer, less-polluting gasoline vehicles rather than older, more polluting ones—which stay on the roads. Coupled with the fact that many credit beneficiaries would have purchased an EV regardless, the environmental benefits seem marginal.
Moreover, government actions influencing market winners can exacerbate this issue. There’s scant justification that the technology trajectory favored by policymakers is optimal. Indeed, these tax credits may be skewing the market, sidelining potentially superior solutions.
By artificially sustaining EV manufacturers and directing consumers toward this specific technology, promising alternatives like hybrids, plug-in hybrids, hydrogen cars, and various alternative fuels risk being undermined. These options, vital to overcoming energy and environmental hurdles, deserve an unbiased opportunity to compete and demonstrate their efficiency and benefits.
Rather than directing the course and determining winners based on political motives, the intention should be to promote open competition and allow innovative solutions to emerge naturally, tailored to diverse consumer needs.
Originally, tax credits were pitched by lawmakers as a boost to transition these products from initial production to mass-market adaptation, thereby negating the need for prolonged financial support. However, we’ve advanced past this juncture.
Though still emerging, the EV sector has progressed sufficiently and no longer requires these supports. Notably, even Tesla CEO Elon Musk—who represents a company significantly benefiting from these credits—advocates for their discontinuation. Similarly, Toyota’s Jack Hollis voiced his opinion against the continued use of costly, ineffective credits.
The time has come to retire this policy. The federal EV tax credit is an inefficient regressive scheme that favors the wealthy at the expense of ordinary Americans. Abolishing it would restore equity, reduce governmental market intervention, and foster genuine competition, enabling resources to flow towards endeavors allowing more individuals to acquire eco-friendly vehicles.
There exist more effective strategies for tackling climate change. One approach involves empowering capital investments across a broad spectrum of green projects by reducing capital gains taxes and reinstating the immediate deduction of 100% of capital investments. Initiatives like solar farms, wind energy, and grid upgrades necessitate substantial upfront investments, which are hampered by the current depreciation rules. Full expensing increases early-year cash flows and facilitates financing. Additionally, streamlining bureaucratic permitting processes could expedite technological deployment.
Propping up luxury car buyers is a misguided tactic for achieving authentic environmental advances. We can and should pursue more effective methods.
