The Electric Kool-Aid Subsidy Test
Tax credits for electric cars are a classic income transfer to the rich. Time to end them.
President Trump’s recent blowup over General Motors layoffs was largely misdirected, though it may spur at least one good policy result. Killing subsidies for electric cars and trucks would be a victory for taxpayers, the federal fisc and the car industry.
Mr. Trump’s initial response to GM’s plant closure news was to threaten to punish the company by stripping its federal subsidies. White House economic adviser Larry Kudlow later acknowledged that Mr. Trump can’t legally single out GM for subsidy retribution. Instead the White House may take the better route of proposing to eliminate subsidies for electric vehicles, in particular the $7,500 consumer tax credit for battery-powered cars.
That handout began as part of the Obama 2009 “stimulus,” and as always supporters said it would be temporary. A decade on, GM, Nissan and Tesla are nearing or exceeding the 200,000-per-manufacturer cap on EV sales that qualify for the full credit. So they are now seeking increases in the cap, joined by other car makers and Democrats preaching climate alarm.
The credits are a classic middle-class-to-rich income transfer. EV batteries are expensive, which means the average starting price for electric cars is around $42,000. That’s some $8,000 more than the average price of a new vehicle, and $22,000 more than the average price of a new gasoline-powered small car.
Wayne Winegarden of the Pacific Research Institute looked at 2014 IRS data and found that 79% of federal EV tax credits were claimed by households with adjusted gross income of more than $100,000. Only 1% of EV buyers earned less than $50,000.
Some states and localities also hand out EV breaks, allowing consumers to reap up to $15,000 (California) or $10,500 (Connecticut) per car. This means the federal program is also a geographic wealth transfer, benefiting mainly wealthy coastal havens. The latest sales data from August shows that 53% of EV sales were in California. The subsidy will cost some $2 billion through fiscal 2019. And taxpayers will also have shelled out another $5.5 billion directly to car makers in federal grants and loans for manufacturing and technology programs by 2019, according to the Winegarden data.
Yet this largesse has not changed the economics of the electric car market. Despite advances in EV technology and all of this government support, most auto makers sell their electric vehicles at a loss. A 2016 Bloomberg News story reported that GM could lose as much as $9,000 on every Chevrolet Bolt.
Automakers stick with these EV losers because nearly a dozen states have adopted mandates requiring that EVs make up a certain percentage of all vehicle sales. Even then, most consumers need coaxing to buy. When Georgia ended its $5,000 state tax credit in 2015, sales of electric vehicles fell 89% in two months. EVs have been on the market since 2010 and are still only about 0.5% of total vehicle sales.
Auto makers worry that without federal subsidies the state EV mandates may make EV production financially ruinous. But then states should end the mandates, or they can pick up the federal $7,500 tab.
As for climate change, studies show that total CO2 emissions from EV cars can even exceed those of conventional gas vehicles—depending on what fuel is producing the electricity to charge the batteries (coal) and how long a car battery charge
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