As the American economy transitions to more renewable forms of energy, federal and state subsidies for electric vehicles should be consigned to history. While electric vehicles (EVs) subsidies might appear to be a creative way to encourage consumers to shift away from petroleum-powered cars, these subsidies only act as handouts to the wealthiest Americans. Furthermore, these subsidies risk crowding out private sector investment and innovation, slowing the transition towards greener transport.
Currently, the federal government offers a $7,500 tax credit for purchasing electric vehicles and several state-level tax incentives that act as a subsidy for wealthy Americans looking to lower their tax liabilities.
Because many EVs are more expensive than their combustible counterparts, wealthy Americans are in the best position to afford electric vehicles and benefit from these federal subsidies. For example, in California, the average income of an electric vehicle owner is $150,000 compared to $90,000 for the average gasoline-powered vehicle buyer. The cost for a standard electric vehicle being $36,000 could be well beyond the purchasing power of most middle-class Americans.
Recently, President Biden proposed $174 billion for electric vehicles and charging stations in his American Jobs Plans, including an increase in the tax credit. Under the legislation advanced by the House Ways and Means Committee last month, the proposed raise in $7,500 tax credit would directly allocate funding to a small and affluent segment of the US population. This subsidy rise would be at the expense of the middle and lower-income households, who would not benefit from increased public spending that would inevitably have to be paid off through increased taxation.
A study by the National Bureau of Economic Research estimates that “high-income households were more likely to reap the benefits of the tax subsidy but were also more likely to buy EVs in the absence of an incentive, relative to lower-income households.” This finding reinforces that only wealthy Americans who were already likely to purchase electric vehicles benefit from this subsidy, meaning that in practice, this subsidy is effectively a coupon for high-income consumers.
While it is true that EVs are getting cheaper over time, this is due to more competition entering the industry and finding more affordable ways to produce critical components, such as batteries, and is not due to tax incentives. A study by Bloomberg New Energy Finance has found that efficiencies created by finding more cost-effective ways to produce batteries and the start of dedicated production lines have been the cause of the falling prices of electric vehicles.
Thus, if both federal and state governments removed these types of subsidies, strong economic evidence suggests that prices would not rise. There have also been more entrants into the electric vehicle market, increasing competition and helping drive down prices. As a result, Tesla is no longer the only option and can no longer dictate prices.
Besides only benefiting the wealthy, subsidies crowd out investment into electric vehicles. While there are already billions of dollars each year being spent by private companies on developing electric vehicles, this amount would be much higher if it was not for governments attempting to guide the sector through fiscal policy.
Studies have shown that when the federal government has historically injected large amounts of money into a state or project, the overall level of private investment into expansion and R&D is dramatically reduced. This is most clear in the examples of earmarks— on average, once a state senator acquired a high-ranking chairmanship and received a large earmark, state-level private investment in capital expenditures decreases $39 million annually, and state private R&D decreases $34 million annually.
Furthermore, polling of electric vehicle owners indicates that the vast majority of people purchasing an electric vehicle are doing so since they feel it is an effective way to combat climate, rather than the tax incentives offered by federal or state governments. A 2020 YouGov poll found that 20% of Americans would consider purchasing an electric vehicle because of environmental concerns, while 16% cited lower running costs and 11% said reduced fuel costs. The polling findings suggest that tax incentives do not play into consumer demand and that removing the subsidy would do little to slow demand.
Electric vehicles can be the future of American roads but subsidizing them will only hinder progress. Instead of providing niche credits to wealthy Americans, the federal government should realize that the private sector can develop affordable electric vehicles without subsidies, and further subsidies will only exacerbate the crowding-out effects.
In the fight for a renewable economy, electric vehicle subsidies will do little to encourage more demand and will only subsidize the wealthiest of Americans.
Published in the Economic Standard