Future Tense

It’s Time to Rethink the Tax Credit on Electric Vehicles

A woman's face appears in a driver's side mirror, against a Chevy Bolt in the background.t.
A Chevy Bolt. Andrew Caballero-Reynolds/Getty Images

This article is part of the Future Agenda, a series from Future Tense in which experts suggest specific, forward-looking actions the new Biden administration should implement.

If you packed 100 policy wonks and environmental scientists into one room and asked about the most effective way to fight climate change, you would likely receive 100 different answers. But it is also likely that a common thread would run between each of these collective responses: the need to electrify. Mitigating climate change requires decarbonization, which will be impossible unless we are able to utilize electricity to accomplish tasks that currently require fossil fuels, such as automobiles, industrial processes, and heating. You can make those things more efficient, but efficiently combusting fossils fuels is still combusting fossil fuels.

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So, we must decouple our economy from fossil fuels and electrify all aspects of our daily lives; this much is certain. And while there has been a recent focus on the final pieces of the electrification puzzle (shipping, airlines, steel production), we shouldn’t ignore the comparatively low-hanging fruit that is the automotive transportation sector. Transportation accounts for 28 percent of all greenhouse gas emissions in the United States, and my research demonstrates that we could cut per-automobile lifetime emissions from 66.4 tons to 6.3 tons of CO2 by charging cars with renewables. Most importantly, the technology exists to make it happen. We aren’t dependent on some moonshot technological breakthrough. We can make the transition today.

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A modification of the current electric vehicle tax credit would be the quickest and simplest way for the Biden administration to accelerate the adoption of EVs. The current $7,500 tax credit is a nice start, but there are two key problems: The current credit caps out too early, and the full credit is only available to earners with $7,500 in tax liability.

The full $7,500 credit goes to people who buy one of the first 200,000+ total vehicles sold by a particular maker, with the phaseout starting the second calendar quarter after the 200,000th car is sold. For example, if a company passes the threshold in November, the credit will be cut in half on April 1 the following year, and then cut in half again six month later. The credit is completely eliminated for the automaker one year after the start of the phaseout, and future buyers will receive zero in subsidies.

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Tesla and Chevrolet both passed the 200,000 mark in 2018 and their cars are no longer eligible for the tax credit, yet they are still producing EVs and competing against other companies in the same marketplace. A $40,000 Tesla or Chevrolet EV will cost the consumer $40,000, while a rival company’s comparable car will effectively cost $7,500 less. There is no real economic or environmental benefit to this, yet it hurts companies for being innovative. It has even become common practice for rival car companies to purchase and disassemble early production Tesla vehicles. Are car companies going to invest in EVs if rival companies can purchase their cars, learn from their technologies, and then sell a comparable vehicle for $7,500 less without losing any profit? Of course not. All manufacturers will be more willing to invest in EVs if they can count on the tax credit extending into the foreseeable future.

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Another key benefit of the EV tax credit is that it makes the market transaction more efficient. Internal combustion engine vehicles produce significantly more pollution than their electric counterparts, and the whole of society is currently subsidizing the costs of this pollution. Each vehicle represents thousands of dollars’ worth of health and climate costs that we all have to pay for. If you are selling two vehicles, one electric and one with an internal combustion engine, for $30,000 each, the internal combustion engine actually costs thousands of dollars more, but those health and climate costs are distributed to everyone, not just the consumer. It you attached a “true cost” price tag on the side of each car that included both the cost of the vehicle and the social costs (health, climate, etc.), the electric vehicle would be cheaper. But there is no “true cost” price tag. Hence the need for an EV subsidy.

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Now, before I anger too many economists, it is important to note that this type of subsidy is not a panacea. Many environmental economists would state that there are better solutions, such as a carbon tax or a phaseout date for internal combustion engine vehicles. But the EV tax credit has one distinct advantage over all other options: It’s already been implemented. This is the Trojan horse of policies (but in a good way). It’s already through the gates. According to a recent survey, 60 percent of the country is comfortable with the idea of subsidizing EVs, which means that an improved tax credit is something that can actually be accomplished.

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A completely uncapped tax rebate would be untenable. But there’s a compromise: Replace the 200,000-vehicle cap with one that is percentage-based. The new “EV Tax Rebate” would apply to all EV sales, for all consumers, until the percentage of EV sales reach 20 percent of yearly automobile sales. The tax rebate would start to diminish during the second calendar quarter after electric vehicles reach this threshold (EVs currently represent 2 percent of sales) and follow a similar pattern to the current system (cut in half every six months and then disappear entirely). This approach gives enough runway to encourage research and innovation, and it significantly compensates for the difference in social costs. The tax credit should also be converted into a tax rebate, so all consumers (regardless of tax liability) would be eligible to use the full amount.

This policy isn’t perfect, but it would be both effective and feasible, which are two traits that few policies jointly possess. This rebate will push EVs beyond 20 percent market share, which will introduce the vehicles—and their distinct advantages (time savings, fewer moving parts, quality of ride)—to the vast majority of Americans (currently a minority of consumers are familiar with EVs). The rebate’s cascade of effects will spur innovation, make the market transaction more fair, and most important of all, lead us toward our necessary electric future.

Future Tense is a partnership of Slate, New America, and Arizona State University that examines emerging technologies, public policy, and society.

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