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.
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.