As more manufacturers of electric vehicles (EVs) approach the 200,000-vehicle limit for the tax credit for plug-in EVs, Congress is likely to consider whether to extend the credit. It’s an opportunity for lawmakers to reexamine these types of credit programs, and that evaluation is important in light of the uptick in political interest in carbon and other environmental taxes. The intersection of tax and energy policy has always been something of a patchwork of priorities and policies, but it should be possible to have a less haphazard approach, and one place to start is with the incentive to purchase new EVs.
The history of alternative vehicle credits shows a trend toward expansion, and it's easy to see why — Americans tend to depend on cars for transportation, so there's an immediate environmental benefit to moving drivers into vehicles that pollute less. From the early 2000s to 2005, taxpayers could take a deduction of up to $2,000 for an alternative fuel vehicle, including hybrids. The Energy Policy Act of 2005 replaced the deduction with the alternative motor vehicle credit of up to $4,000.
In 2006 the Joint Committee on Taxation estimated that the cost of that credit would be $800 million between 2006 and 2010 (JCS-2-06). Congress added the credit for EVs and plug-in hybrids in 2009. It’s now a credit of up to $7,500 until the manufacturer has sold 200,000 vehicles, after which there's a phaseout. The House Ways and Means Committee flirted with the idea of repealing the credit in the Tax Cuts and Jobs Act, but ultimately left it alone. The JCT estimated that the cost of the credit from 2018 to 2022 is $7.5 billion (JCX-81-18).
There are design flaws in the EV credit policy, which are representative of those in similar technology-specific policies. The credit is narrowly targeted to EVs, which causes manufacturers to direct their attention there, largely to the exclusion of other environmentally friendly technologies. It's unclear whether the forgone tax revenue is actually a deciding factor in persuading taxpayers to adopt EV technology or for manufacturers to continue to offer it. These credits and similar ones might mostly change consumers' habits by causing them to shift the timing of purchases to capture the tax benefit. And the credit disproportionately goes to taxpayers with household incomes well above the average for the United States.
Perhaps most importantly, the credit doesn’t address the practices of driving regularly and long distances, and discarding old cars and buying new ones before the ends of their useful lives, despite these activities' environmental impact, which may be at least as damaging as car fuel selection. The owner of a car with an internal combustion engine that mostly sits in a garage and is driven only occasionally for short distances receives no tax benefit for a low-emissions choice, but the buyer of a new EV who drives tens of thousands of miles a year does, even though the total emissions associated with the new car could be higher than those of the rarely driven car.
Because it favors buying new cars, the EV credit could make frequent car replacement more appealing to some taxpayers, but that isn’t an environmentally neutral choice either. The technology-focused credit makes no attempt to address and fix the problem of usage, and that’s a deficiency from an environmental perspective.
Similar to usage, the equity considerations of EV credits may be a secondary concern for policymakers, but subsidizing the purchase of a new vehicle is inconsistent with a progressive system of taxation. In a 2015 paper, Severin Borenstein and Lucas Davis, both of the University of California, Berkeley, found that the top income quintile had received about 90 percent of all EV credits since 2006. The top income quintile in 2015 started at incomes over $113,000. The median household income in the United States in 2018 was $63,179. That result makes sense, because lower-income households are less likely to buy new vehicles, regardless of their fuel source.
Similarly, the Congressional Research Service reported in a 2019 paper that “for 2016, 78% of the claimants filed returns with adjusted gross income (AGI) of $100,000 or more, and such returns accounted for 83% of the amount claimed.” The CRS noted that about 17 percent of total tax returns had an AGI of $100,000 or more. In 2016, the latest year for which the IRS has released numbers, only 60,245 out of 150 million total tax returns claimed the qualified plug-in electric drive motor vehicle credit. Finally, purchases of used EVs are ineligible for the credit, making it even less accessible for lower-income taxpayers.