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Congress Should Rethink Electric Vehicle Subsidies

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Congress Should Rethink Electric Vehicle Subsidies

November 29, 2018

Electric vehicles are the darlings of the automobile industry. In addition to Tesla, all of the traditional automakers – both here and abroad – have been pouring billions of dollars into developing new EVs while slowly abandoning the production of gasoline-powered vehicles.

But while EVs may be innovative technological marvels, old-fashioned subsidies continue to drive the industry. The federal government provides a tax credit to EV purchasers of $7,500 for the first 200,000 vehicles sold by any individual manufacturer. Once an EV manufacturer reaches that sales milestone, the tax credit is gradually decreased over the subsequent 15 or so months. Individual states have sweetened the subsidy pot further, offering rebates up to $5,000, along with subsidies for installing home and business charging stations, subsidies for installing home and business solar panels, “free” charging stations along major highways, and even preferred access to carpool lanes. And just to make sure EVs are adopted, some states have implemented mandates that require increasing percentages of new vehicles sold to be EVs.

Now, two bills introduced in the Senate propose radically different paths for the EV industry. Senator John Barrasso’s (R-WY) legislation (S. 3559, the “Fairness for Every Driver Act”) would eliminate the federal tax credit for EVs immediately and impose a user fee on EV owners to compensate for their not paying the gasoline taxes that are used to maintain the federal highway system. Senator Dean Heller’s (R-NV) bill (S. 3582), on the other hand, would expand the federal tax credit by eliminating the 200,000 vehicle cap, but then would phase out subsidies beginning in 2022.

Subsidies, however, are like powerfully addictive drugs: once started, they are a difficult habit to kick. The production tax credit for wind generators, for example, was supposed to have ended years ago. Instead, it has been extended numerous times. And, while it is now slated to end with wind turbines built next year, there are moves in Congress to extend it yet again. Thus, Senator Barrasso’s bill, while noble in its economic intent, will likely to face fierce opposition from automobile manufacturers and states who believe EVs will help “solve” climate change.

Because of the allure of subsidies, Senator Heller’s bill may become a fiscal nightmare. For example, if EV sales increase to one million per year – a relatively small percentage compared to the 16 million or so annual sales of gasoline-powered vehicles – the tax credit alone would cost $7.5 billion each year. And as EV sales increase – helped by the continued Federal tax credit – the loss of revenues to the Highway Trust fund that maintains the federal highway system will accelerate. For example, an EV owner who would otherwise purchase 500 gallons of gasoline per year in a similar gasoline-powered vehicle avoids about $95 per year in federal gasoline taxes (to say nothing of lost state gasoline taxes). As EV sales increase, the annual loss in gasoline tax revenues will grow rapidly. If an additional one million EVs are sold each year, the tax loss would increase at a rate of $100 million dollars per year.

With massive investment in EVs by automobile manufacturers, there is simply no economic reason to continue the federal tax credit, much less expand it as Senator Heller’s bill would. Nor is there any reason to subsidize EV owners who use federal highways, but do not pay the gasoline taxes needed to maintain them.

Yet, EV subsidies have an even more pernicious impact owing to their inequality. As my recent Manhattan Institute report on EVs discussed, EV subsidies have primarily benefitted the wealthy. A 2017 nationwide survey found that over half of EV buyers had annual household incomes of at least $100,000, and almost one-fifth had household incomes above $200,000. These subsidies, therefore, come at the expense of lower-income consumers, many of whom cannot afford to purchase new vehicles of any kind, much less EVs that are, on average, costlier. Moreover, these lower-income drivers of gasoline-powered vehicles will shoulder an increasing burden of highway maintenance costs.

Senator Barrasso’s bill would address this fundamental inequality and introduce sorely needed economic and fiscal sanity to the EV gravy train. In contrast, Senator Heller’s bil would make things even worse.

Jonathan A. Lesser, PhD is the President of Continental Economics and an Adjunct Fellow with the Manhattan Institute. His report, “Short Circuit: the High Cost of Electric Vehicle Subsidies,” was published in May of this year.

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