News broke recently that the US Senate is considering doing more to help EV adoption, which is a great thing.
According to a summary from Schumer’s office, the bargain reached between Senate Majority Leader Chuck Schumer and Democratic Senator Joe Manchin includes an expansion of the current $7,500 electric vehicle tax credit as well as a new $10 billion investment tax credit to establish clean-tech manufacturing facilities. The deal would also include a brand new $4,000 tax credit for used electric vehicles and other new tax credits and subsidies for carmakers to retool plants to produce greener automobiles.
Before we get too excited, we also have to keep in mind that news of Senate deals doesn’t mean anything is for sure going to get passed into law. We must recall that in 2017, President Joe Biden proposed raising the federal tax credit for electric vehicles to $12,500 per vehicle — $4,500 of which would be available to union-made cars — as well as lifting a cap of 200,000 vehicles per manufacturer on the $7,500 credit, but that never happened.
There were several other things in the bill for EV drivers and EV production, but what I want to focus on in this article is the problem with tax credits, especially as we try to get people with average and lower incomes to buy EVs. The problem is that tax credits just aren’t as helpful as wealthier people think.
What Studies Show
A couple weeks ago, we ran a story from George Washington University that told us about a study about this very topic. The results? Basically what anybody with lower incomes and little or no federal tax burden would tell you: that rebates (or, money directly toward the purchase of a car) would actually be helpful. In fact, a straight rebate is so much more helpful that you could give a smaller rebate and still get people to buy the EV.
“If you gave the incentive to car buyers as cash on the hood, our study found that you could lower the subsidy by almost $1,500. That’s how much people value immediacy,” Laura Roberson, an engineering management and systems engineering PhD student at GW and lead author of the study, said. “So $7,500 in April when I file taxes is the same to me as $6,000 if you gave me that money at the point of sale. That’s a huge difference in valuation.”
Why This Is
If you’re a taxpayer, the idea of having a smaller tax bill next year sounds appealing. The vehicle’s sale price doesn’t get lower, but you’re probably not in a position where paying a few extra bucks every month for the value of that tax credit isn’t a huge deal.
But, we have to remember that in 2021, 57% of US tax filers didn’t end up owing anything. Plus, with the Earned Income Credit and other refundable tax credits, many filers end up with a “tax refund” that isn’t actually a refund, but is money from the federal government that they didn’t pay in during the year. This varies by income, the number of kids you claim, and other factors.
So, for more than half of people filing taxes in the United States, a tax credit would do very little for them. Instead of “getting $7500 at the end of the year” like a car salesman would tell you, the reality is that it might net them a grand or two in some cases, or cause them to get less back from the Earned Income Credit in others. It’s a complex thing that computer software struggles to get right, and isn’t easy for a person to predict.
Then there are many people who pay something but don’t owe anywhere near $7500. For that segment of the population, you end up only getting a partial benefit of the tax credit.
The only people actually getting the full benefit from such a tax credit are probably the upper 25% or so of US filers, so we end up with exactly what Republicans often accuse tax credits of doing: giving money to the rich to get fancy cars. Adding purchase price limits means people actually benefiting from the tax credits are less interested in EVs, and adding income limits to fix this could create only a slim “donut hole” of people who actually get any benefit from the credits at all.
The easy fix would be to change the tax credit so that it has an income cap and is refundable, so that low income families could actually get that $7500 at the end of the year, but that still isn’t super helpful. Why? Because signing up for a higher car payment today starts hitting your household budget in 45 days while the money doesn’t show up until next year. Even if you did put that money toward the car loan, it wouldn’t lower your payment (the loan would just end sooner).
Rebates, especially “point of sale” rebates, have the advantage of actually making the car cheaper to buy and easier to get approved for a loan for. This would give the maximum benefit to people with lower incomes and could be done at lower amounts. Even more importantly, having the credit apply as a down payment on the car greatly helps the chances of people with bad credit to actually buy an EV instead of having to settle for a much cheaper gas-powered beater.
One Thing The Senate Needs To Look Out For: Dealers Swallowing The Rebates
When they suggested extending tax credits or doing rebates last year, I warned readers that unscrupulous dealers would try to eat up the tax credit instead of letting buyers get a lower price. With what I’ve seen during chip shortages and other supply chain issues, dealers have only gotten worse about this behavior.
How does this work? The dealer just raises the price on new cars with “market adjustments” and “protection packages” that more resemble a protection racket than a service plan. But, hey! Look at the great deal you’re getting with the tax credit!
This can be fixed by only allowing dealers to sell the car at MSRP price, minus the POS rebate. Anything higher, and the dealer won’t get their check from the federal government. That would solve that problem right away, but to do that, Senators need to be warned.
Featured image: the US Capitol building, by the US Architect of the Capitol (public domain)
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