Monthly Archives: December 2016

The Plug In Vehicle Tax Credit- A Corporate Handout That Doesn’t Help Consumers or the Environment

The Plug In Vehicle Tax Credit was created as a part of the Energy Improvement and Extension Act of 2008.  The tax credit was created with the intent of boosting consumer adaption of Electric Vehicles, as a way to help combat climate change. However, with the way the policy was created, it does very little to boost production of electric vehicles. Instead, it simply provides a handout to manufacturers of electric vehicles, at the expense of the taxpayer.

The electric vehicle tax credit provides a credit of up to $7,500 to individuals/households that purchase a qualifying electric vehicle, with no income limit. While the  credit is based on the capacity of the battery installed in the vehicle, most vehicles that qualify for this credit have a battery with a large enough capacity to qualify for the entire $7,500 credit.

Instead of creating an expiry date for the tax credit, the law instead created a threshold at which the tax credit phases out.  The tax credit can only be applied if the producer of the EV sold less than 200,000 qualifying vehicles in the United States within a 1 year time period. If the 200,000 threshold is hit, the tax credit begins to phase out over the course of a 1 year period.

The intended purpose of this is to ensure that the tax credit remains in effect until electric vehicles see widespread adaption, and then phases out in order to prevent the tax credit from becoming too expensive for the federal government. Basically, it is supposed to exist to help the electric vehicle market grow, and then phase out once it becomes large.

The tax credit, with it’s 200,000 vehicle limit, encourages EV manufactuers to keep prices high, and limit production. When the government will cover $7,500 of the bill of a purchased EV, this means that producers of the vehicle can raise prices by $7,500 while effectively maintaining the same level of demand they had prior to the tax credit.

Because the tax credit only applies to companies selling less than 200,000 electric vehicles in the US per year, the companies that make these vehicles are heavily rewarded for staying within this threshold. By keeping production low to maintain eligibility for the tax credit, electric vehicle producers can keep prices high, as the tax credit makes up for any loss in demand. It’s much more profitable to sell a small amount of vehicles with massive profit margins(thanks to the government) than it is to sell a large amount of vehicles with small profit margins.

Additionally, because the Tax credit is non-refundable(meaning it can’t reduce your tax liability below $0), this means that in many cases, only upper-middle and upper income taxpayers get the full benefit of the credit. This further incentives companies to brand electric vehicles as luxury vehicles, as the consumers that are most affected by the tax credit are those that pay at least $7,500 in federal income taxes per year.

By keeping production low to maintain eligibility for government subsidies, manufacturers don’t need to invest as much capital in building new facilities or hiring more workers for mass production, likely resulting in less job creation than if the government would have stayed out of the market.

teslamodelx

With A MSRP of $74,000, the Tesla Model X can be considered a luxury purchase, and not a mainstream vehicle.

Since the creation of the credit in 2008, we still haven’t seen manufacturers come close to the 200,000 vehicle phaseout threshold. Instead of investing resources in scaling production efforts and increasing sales, revenue from sales has either been pocketed as profits, or invested in creation and production of extra luxury features in order to justify the high prices of the vehicles sold.

The tax credit has created a shift in the electric vehicle market. Instead of investing capital in the mass production of affordable electric vehicles, which would be beneficial to the environment, the increased revenue resulting from the tax bill has instead encouraged companies to limit electric vehicle production to expensive vehicles with luxury features, in order to retain eligibility for indirect government subsidies. Many manufacturers of electric vehicles also produce gasoline powered cars, which they continue to sell to meet the demands for low-mid priced vehicles. If the U.S Federal government stopped discouraging corporations from designing electric vehicles as luxury cars via conditional tax subsidies, perhaps we’d see more entry-level electric vehicles being mass produced.

source: https://www.irs.gov/businesses/plug-in-electric-vehicle-credit-irc-30-and-irc-30d

 

Why Obamacare is Making Healthcare So Expensive

The Patient Protection and Affordable Care act, often called Obamacare, has resulted in healthcare expenditures growing at a rapidly increasing rate. The average premium on a benchmark silver health insurance plan is increasing by an average of 22% in 2017, according to the Department of Health & Human Services. Some states such as Arizona are seeing even worse results, which will experience a massive average increase of 116%.

Obamacare requires that insurance companies spend at least 80% of their insurance premium costs on healthcare expenses and healthcare quality improving activities- leaving only 20% of their gross income for administrative costs, marketing, overhead costs, and profits. If they fail to meet this requirement, they have to refund their enrollees the difference. The threshold is raised to 85% for companies providing large-group plans.

At first, this clause may sound good. It attempts to reduce insurance company profits and administrative expenses through force, in an attempt to ensure that the law isn’t a handout to insurance companies due to the mandate, and that money spent on premiums actually goes towards healthcare.

However, this clause means that the only way for insurance companies to increase profits is to drive up the cost of healthcare. They can’t increase the percentage of their profit margin due to the requirement that 80% of insurance premiums are spent on healthcare expenses, but they can increase the overall size of their profits by charging more for insurance, while simultaneously paying out more to hospitals and drug companies in order to stay within their limits.

The Affordable Care Act now includes an employer mandate, requiring that employers of full time employees provide their employees with health insurance, with an exemption for small businesses. This has resulted in many companies converting full time jobs into part time jobs, in order to circumvent having to pay for expensive healthcare.

The Affordable Care Act also established that anyone below 400% of the federal poverty level has a cap as to how much they personally will have to pay for an insurance premium, if their employer doesn’t provide it. If their insurance premium costs more than a figure based on their income, the government will make up the difference in the form of a refundable tax credit. For example, a family of 4 with an income of $36,450 will not have to pay more than 4.08% of their income on their insurance premium for a silver plan. For them, if the second cheapest insurance provider in their area charges more than $1487.16 per year, the government will make up the entire difference.

In a market without subsidies or government intervention, hospitals and drug companies could only charge what people are capable of paying. When the government starts providing unlimited subsidies(they’ll cover as much as the 2nd cheapest insurance provider charges with no limits) to it’s low and medium income citizens, it creates a situation where insurance companies and healthcare providers profit immensely from the federal government’s inability to negotiate it’s expenditures.

This likely contributes to why the cost of individual plans is growing at a rate substantially faster than group plans. The government has an enormous amount of money due to it’s massive tax revenue and ability to deficit spend, whereas businesses have a much more limited ability to pay for insurance. If insurers charge businesses too much for group plans, the business will either reduce the amount of people they hire, or attempt to convert full time jobs into part time jobs.

With businesses, there’s at least some elasticity involved in business demand for insurance plans, because they can reduce the amount of full time positions at their company if their healthcare costs become too expensive to justify them. With the federal government providing unlimited subsidies to qualifying individuals, they will pay whatever they are obligated to pay based on the tax code, until the law is changed. The insurance companies then take these maximum subsidy payouts, burn 80% of it by paying drug companies and healthcare providers way more than they need to, then profit from the rest. These terrible negotiations of pricing are mutually beneficial to both the insurance provider and the drug companies, at the expense of both the taxpayer, and the poor folks that have to pay for an overpriced individual health insurance plan without eligibility for a government subsidy.

You may think that competition will force insurance providers to keep insurance premiums low. Unfortunately this is not the case, as many locations are down to just one provider within the ACA exchange. Insurance companies are a type of company that require a massive amount of capital to create, so it’s very easy for monopolies to form. The 80:20 rule on insurance company spending requires insurance companies to maintain risky profit margins, so it isn’t something where a small business can just come in and compete. The nature of insurance is that it requires a large pool of people to balance risk and create predictable results based on probability and data.

Many have proposed allowing insurers to compete across state lines. This will help create competition and make it more difficult for insurance companies to drive up the cost of healthcare in order to improve their profits, but it is only a band-aid fix that will slow down the rate that insurance companies attempt to increase healthcare costs.

The Affordable Care Act, while it carries good intentions, ultimately acts a massive handout to healthcare providers, pharmaceutical companies, and insurance companies. It is creating a giant hole in our economy, dragging up costs for businesses as health insurance premiums rise, thus resulting in reduced wage growth, a weakened economic recovery, and less money leftover in the pockets of consumers.

Sources:

https://www.healthinsurance.org/obamacare/will-you-receive-an-obamacare-premium-subsidy/

https://www.whitehouse.gov/blog/2014/07/24/8020-rule-saving-americans-lot-money-what-exactly-it

http://money.cnn.com/2016/10/24/news/economy/obamacare-premiums/