Why We Should Rethink EV Tax Credits: A Case for Change

Imagine a world where your hard-earned tax dollars are being funneled into a program that mostly favors the affluent while leaving the average American to foot the bill. That’s the reality of the federal tax credit for electric vehicles (EVs), a program that has lost its way and become a prime example of government overreach and economic disparity.

Launched in 2008 to spark interest in a nascent market, this initiative was renewed and expanded in 2022 as part of the Inflation Reduction Act. Yet, despite its good intentions, it has become a mere subsidy for the wealthy elite. It’s time for Congress to hit the brakes and put an end to this misguided program.

Let’s talk numbers. With our nation wrestling a staggering $2 trillion budget deficit that keeps ballooning, the last thing we need is more fiscal drain. According to the Treasury, the EV credits under the Inflation Reduction Act—which can be as much as $7,500 for new EVs and $4,000 for used ones—could cost taxpayers an eye-popping $112 billion in lost revenue. And if recent trends are any indication, that cost may be far higher.

These EV credits are also part of a larger industrial policy mess, which includes energy tax breaks, mandates, and “buy American” requirements that could climb to over $1 trillion in the next decade. This only deepens the financial hole we find ourselves in.

What about fairness? While some may argue these credits are good for the environment, they disproportionately benefit the privileged few who can afford pricey electric cars. Most Americans, who drive modest gasoline-powered vehicles, receive no benefits from this credit, despite being the ones footing the bill. Studies show that the bulk of these credits flow to higher-income individuals. In fact, a Congressional Research Service study revealed that in 2021, taxpayers with adjusted gross incomes over $100,000 comprised just 22% of all filers but captured a staggering 84% of the credit benefits.

True, the Inflation Reduction Act has set income limits for the credits—$150,000 for single filers and $300,000 for joint filers—which may allow some low-income earners to benefit. However, the reality is that even with these credits, EVs still carry heftier price tags than their gas-powered counterparts. Furthermore, homeowners—who tend to have higher incomes—are the ones most likely to install home charging equipment. This means that EV tax credits will likely continue to be an exclusive perk for those with deeper pockets.

Recent studies paint an even bleaker picture. One analysis found that an astonishing 75% of EV subsidies claimed under the Inflation Reduction Act went to consumers who would have purchased an electric vehicle regardless of the credit. The cost to taxpayers per incentivized vehicle purchased? A staggering $32,000. This glaring truth indicates that these credits fall woefully short of their intended goals and only serve to reinforce the need for further government mandates.

And let’s not ignore the current market trends. Despite taxpayer assistance, EV sales have stagnated, making up just 7% of the overall market. This clearly indicates that while tax credits may adjust the timing of purchases, they’re failing to create genuine demand.

Now, for those who are convinced that these credits are a necessary evil in the battle against climate change, hear this: The environmental benefits of the credit are murky at best. EVs are not entirely emission-free when you factor in the carbon footprint involved in battery production and electricity generation. Moreover, they often replace newer gas vehicles that already pollute less than older models still on the road. The notion that these tax credits yield substantial environmental gains is increasingly questionable.

Moreover, the government should not be playing favorites in technology development. Favoring electric vehicles over hybrids, hydrogen fuel cells, and alternative fuels only stifles innovation and competition. Each of these alternatives deserves an equal chance at proving their viability in tackling environmental and energy issues.

Originally, these tax credits were pitched as a temporary measure to help the EV market grow to a point where it could stand on its own. Well, the market has matured, and these crutches are no longer necessary. Even Elon Musk, the CEO of Tesla—the leading name in U.S. EV sales—has voiced that the credit should come to an end. Toyota’s Jack Hollis has also called for the cessation of these costly and inefficient subsidies.

It’s time to say goodbye to this flawed policy. The federal EV tax credit is inefficient and regressive, benefiting the wealthy at the expense of everyday Americans. Ending it would restore fairness, decrease government intrusion in the market, and allow genuine competition to drive the development of cleaner vehicles.

There are smarter, more effective ways to combat climate change. We can unleash capital to fund a broader range of green and innovative projects by cutting taxes on capital gains and allowing 100% immediate deductions for capital investments. Initiatives like solar farms, wind turbines, and upgraded grid infrastructure demand significant upfront investment. Without full expensing, these costs drag on for years, limiting tax benefits and stifling potential growth.

Additionally, a streamlined permitting process is essential for efficient innovation. The federal government must remove the bureaucratic barriers that hinder progress and make it easier to build and innovate.

Subsidizing high-end vehicle buyers is not the path to meaningful environmental progress. We have the knowledge and tools to do much better.

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