Commentary: The case for killing the tax credit for electric vehicles

The federal tax credit for electric vehicle purchases has far outlived its purpose and now stands as a glaring example of government overreach and economic inequity.

Originally introduced in 2008 to stimulate a fledgling market, and then renewed and expanded in 2022 as part of the Inflation Reduction Act, this credit remains what it has been from the start: an ineffective subsidy primarily benefiting the wealthy. Congress should end it.

On the fiscal side, we face a $2-trillion budget deficit, and it’s growing. According to the Treasury, the credits for electric vehicles in the Inflation Reduction Act, which can be up to $7,500 on certain new EVs and up to $4,000 on certain previously owned EVs, represent $112 billion in lost revenue. But based on the last few years, there are reasons to believe the cost will be much higher.

In addition, the EV credits are part of an industrial policy package of energy tax credits, mandates and “buy American” requirements under the IRA that will cost more than $1 trillion over 10 years, deepening the deficit hole we find ourselves in.

Beyond the price tag that burdens taxpayers, the credit is unfair to the vast majority, who — being less well off than EV purchasers — drive relatively affordable gasoline-powered vehicles and do not reap any financial benefit from the credit.

Studies repeatedly show that most of these credits go to higher-income individuals, making the credit a tax cut for the rich. For instance, the Congressional Research Service study noted: “For vehicles purchased in 2021, taxpayers with adjusted gross income (AGI) greater than $100,000 represented 22% of all filers and received 84% of the credit benefits.”

The IRA tax credit’s income limit ($150,000 for single filers, $300,000 for joint filers) and refundability may tilt some benefits to low-income taxpayers. However, EVs have higher purchase prices than comparable gas vehicles, even with tax credits, and installing home charging equipment is easier for homeowners, who tend to have higher incomes, versus renters. As a result, EV tax credits will probably remain a higher-income taxpayer boondoggle.

In fact, a recent study by five economists finds “that 75% of the EV subsidies claimed under the IRA have gone to consumers who would have bought an electric vehicle anyway.” According to their calculation, each car sold due to the incentive (roughly 25% of the total number of vehicles sold) came at a cost to taxpayers of $32,000. The credit’s inability to attract those who would prefer to purchase a gas vehicle is a clear sign of its failure, which explains the need to impose even more authoritarian measures like EV-related mandates.

Making matters worse is the fact that in recent months, the sales of EVs have stalled. Despite the taxpayers’ help, sales remain stuck at 7% of the market, strongly suggesting that while tax credits may change the timing of electric vehicle purchases, they are not increasing the demand.

To those who believe that the cost and disparity in our tax code are worthwhile because we must fight climate change, I have news for you.

First, the environmental benefits of the credit are unclear. EVs are not emission-free when considering the carbon footprint of battery production and electricity generation. Also, EVs primarily replace the purchase of newer gas vehicles, which pollute less than the older vehicles that remain on the road. Combined with the fact that many tax-credit recipients would have purchased an EV anyway, it’s unlikely that there’s much environmental bang for the buck.

The cost of the government picking winners compounds this problem. There is little reason to believe that the technological path that government officials happen to prefer is the optimum one — and the danger is that tax credits are creating market distortions that crowd out better solutions.

By artificially propping up EV manufacturers and steering consumers toward one specific technology, other — perhaps better — technologies can be thwarted. Hybrids, plug-in hybrids, hydrogen fuel cell cars, alternative fuels or other emerging innovations are penalized despite their important role in addressing environmental and energy challenges. Each deserves equal footing to determine which can deliver more effective environmental benefits, lower costs or both.

Yet, instead of fostering open competition and letting the best solutions reveal themselves or allowing different technologies to serve different customer needs, the tax credit creates winners and losers based on political priorities.

Finally, the tax credits were initially sold by congressional sponsors as a means “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.” We’ve already passed that stage.

While still small, the EV market has matured and no longer needs these crutches. Even Elon Musk, the chief executive of Tesla Motors — the leader in U.S. EV sales with 2 out of 3 cars sold and the biggest beneficiary of the credits — says that it should end. Writing in the Wall Street Journal, Toyota’s Jack Hollis also called for the end of expensive and inefficient tax credits.

It’s high time this policy goes away. The federal EV tax credit is an inefficient, regressive program that benefits the wealthy at the expense of average Americans. Eliminating it would restore fairness, reduce government interference in the market and, through genuine competition, better allow resources to go toward initiatives that enable as many people as possible to purchase cleaner vehicles.

There are far more effective ways to design policies to address climate change. The best is to unleash capital to fund as many green and innovative projects as possible by reducing taxes on capital gains and renewing the ability to immediately deduct 100% of capital investments. Projects like solar farms, wind turbines and grid infrastructure require massive upfront capital investments. Without full expensing, these costs must be depreciated over many years, reducing the present value of tax benefits.

In addition, better cash flows in the early years make it easier to secure financing. There is also a timing issue. The clean energy transition requires rapid deployment of new technologies. Full expensing encourages companies to accelerate investments rather than delay them. The federal government also should lift the permitting barriers that bureaucrats have erected that make building and innovating harder than they should be.

Subsidizing high-end car buyers is a poor strategy for achieving meaningful environmental progress. But we know how to do better.

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Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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