A new survey has confirmed something that Charged and other EV media have been saying for years: the US federal EV tax credit is about as inefficient a way to encourage EV adoption as could be imagined. Providing a “cash on the hood” rebate instead could have resulted in more EV sales at a lower cost to taxpayers.
Experience has shown that financial incentives play an important role in encouraging EV purchases. Generous tax breaks are invariably cited as one reason Norway has become the world’s EV capital. A 2017 study of EV sales in the EU found that market uptake of EVs was strongly correlated with government incentives. The state of Georgia transformed itself from an early EV leader to an EV laggard in 2015 when it eliminated a tax credit and imposed a new yearly fee on EV owners.
New research from the George Washington University, however, finds that not all incentives are equally effetive. The paper, “Not All Subsidies are Equal: Measuring Preferences for Electric Vehicle Financial Incentives,” which was published in the journal Environmental Research Letters, argues that, of all the possible forms of incentive, the current federal tax credit is valued the least by car buyers.
As I and many others have explained, the federal tax credit has several problems. It applies only to federal income tax—not to social security tax, self-employment tax, or state taxes—and it can’t be carried over to a future tax year. Thus, the only buyers who can take full advantage of the credit are those who owe at least $7,500 in federal income tax in the year they buy an EV. Generally speaking, this means earners of high salaries. The credit can’t be applied to used vehicles, which further discriminates against lower-income taxpayers. It was designed to sunset for individual automakers as they reached certain levels of EV sales, which had the perverse effect of penalizing automakers that were pioneers in the EV space (Tesla, Nissan) and rewarding those that sat on the fence for the last decade.
“The current federal electric vehicle tax scheme is a pain,” said John Helveston, an Assistant Professor at GW and a co-author of the study. “First of all, you have to have money. You have to be wealthy enough to buy the whole car and then wait for your tax-break kickback in April. But if you’re not in that class of buyers, you often need the money when you buy the car or you’re not going to buy it. Our study shows that an immediate rebate at the point of sale would be more equitable and potentially more effective in broadening the buying market for electric vehicles.”
As we learned in basic economics, a dollar today is worth more than a dollar promised for next April. The researchers conducted a national survey of car buyers to quantify how much they valued different types of incentives, such as a tax credit, a tax deduction, a sales tax exemption, or an immediate rebate. Unsurprisingly, they found that car buyers overwhelmingly preferred an immediate rebate provided at the point of sale. For the same subsidy amount, buyers valued a rebate by $1,450 more than a tax credit. For respondents from lower-income households and used vehicle buyers, the greater value of the rebate was double that amount.
“If you gave the incentive to car buyers as cash on the hood, our study found that you could lower the subsidy by almost $1,500. That’s how much people value immediacy,” said Laura Roberson, a PhD student at GW and lead author of the study. “So $7,500 in April when I file taxes is the same to me as $6,000 if you gave me that money at the point of sale.”
The research team estimates that the federal government could have saved $2 billion, or an average of $1,440 per EV sold, if the federal subsidy between 2011 and 2019 had been delivered as an immediate rebate instead of a tax credit.
“All the incentive money that we’ve been spending to try to get people to buy electric vehicles, it’s mostly gone to the wealthiest car buyers. It’s not doing a good job of spurring wider adoption of electric vehicles,” Helveston said. “Our results suggest that structuring incentives as immediate rebates would deliver a greater value to customers, be more equitable, and accelerate electric vehicle purchases in the United States.”
Unfortunately, these findings are probably moot as regards the US. The Biden administration tried valiantly to implement a comprehensive package of pro-EV measures that would have included a restructuring of the tax credit program, but all that survived (other than a vague and timid aspiration to make electrified vehicles half of new car sales by 2030) was a $7.5-billion package of infrastructure investment. Unless there is some unexpected upheaval in US politics, federal support for EVs, such as it is, is likely to be terminated after January 2023.
Source: George Washington University