Like any legislation brokered between stakeholders and lawmakers, the present federal tax credit of up-to $7,500 for buyers of qualified plug-in electrified vehicles involves compromises, pros, and cons.
That it has been a boon to the nascent industry is widely agreed upon and proponents note that since December 2010 when just three plug-in cars were for sale in the U.S. that number has grown to 21 and counting. But whether the system is as fair or good as it could be – or should be overhauled or dismantled altogether – has been contended.
Chief among proponents who’d like to see the system updated is President Barack Obama. This year for his proposed budget he again floated the idea of converting the tax credit to a point-of-sale rebate and raising the cap to $10,000. And, he added to these ideas he first asked for in 2011 by proposing incentives for more types of alternative-fuel vehicles.
This article – while only brushing on salient subtopics of a broad subject – relies in part upon an in-depth interview with a highly placed industry stakeholder who’s been involved with these issues from the beginning.
Favors Higher Earners?
Although all income levels may benefit, critics have observed the tax credit has often catered to higher wage earners.
Early adopters of the 2011 Chevrolet Volt – as just one example – had average household incomes of $175,000 and other plug-in buyers have been from the six-figure league.
The way the plug-in tax credit rules are now, buyers hoping to claim a full $7,500 tax credit tend to need a decent middle-class income. It can be well below $100k-plus, but the system has seen the relatively better off benefited and plug-ins are bypassed by “the masses” as an inexpensive “game changer” is hoped for in due time.
Of course there are other big reasons for this including battery costs hurdles, but with regard to the tax credit being an economic stimulus, there are two sides to this observation. Many have said that the current state of affairs is as it should be: of necessity new technology costs more, so it makes sense to sell products to those who can appreciate and afford it.
On the other hand, there’ve been those who cite Henry Ford and his Model T, and say the idea of selling affordable cars in volume, and making profits through raising economies of scale and selling more units is a better objective. Unless leasing the car, a tax credit instead of a rebate precludes lower income earners; it assumes one makes enough money to pay enough taxes to get the credit.
From a grow-the-market standpoint, if the idea of proliferating plug-in electrified vehicles (PEVs) is a rationale for a credit, say those in favor of a rebate at time of sale, wouldn’t that help put more people in more cars and speed the process? Wouldn’t that incentivize automakers to make more down-market products sooner?
So far, the first scenario is how the political winds and industry sensibility has gone, and this has possibly reinforced its sense of validity for many observers.
What’s More Egalitarian?
Arguments in favor of a point-of-sale rebate – such as 5,000 pounds offered in the UK, for example – would mean consumers would not have to front the money. They’d also not have to wait many months to over a year to get it back – assuming they do get it back and did not miscalculate. And a rebate would mean consumers would not be effectively penalized just because they do not earn enough money, it’s been said. Even retirees with money saved, but low income, are inadvertently penalized.
Effectively, the system is skewed to those with the income to buy a plug-in car at a premium over a roughly comparable internal combustion engine vehicle.
This has been said to defy one of the fundamental tenets of a so-called “economical car.” If the purpose is to save consumers money on the sale, it’s been argued that the ones with lower earnings are the ones who most need such a perk. And it’s been said if plug-in cars are meant to save on operational (fuel/energy) costs, likewise lower income people are the ones who need the breaks the most.
As mentioned, an exception could be if a consumer leases the car and the leasing company – which recoups the $7,500 credit – credits the lessee and lowers the payment. Nissan Leaf lessees for example can get the full $7,500 credited, and up to 85 percent do lease Leafs says IHS Automotive. But others, such as Chevrolet Volt lessees, do not normally get the whole $7,500 off of the lease deal and 49 percent lease the Volt.
The federal tax credit has been castigated as often as praised, and critical observers have pointed to Obama’s goal for the U.S. to be first to put one million PEVs on the road, and do it by the end of 2015.
Presently, there have been just over 300,000 PEVs sold and the U.S. is not on target, the administration has conceded. Reasons for why this is go way beyond whether the credit has been effective, but for his part, Obama has asked for a point-of-sale rebate and higher cap to help meet this goal.
The federal tax credit for plug-in vehicles originated with bipartisan support at the end of the Bush era. It was thus done in a Republican-controlled White House, but democrats including Obama did support it.
The first bill that allowed for plug-in cars did so two years before the Nissan Leaf and Chevy Volt were launched in December 2010. That was H.R. 1424, and subsequently with Obama in the White House, H.R. 1 amended the rules, reducing the dollar cap to $7,500 – it had been up-to double the $7,500 for certain types of vehicles.
Rationale For the Credits
The idea of propping up the plug-in industry built on the precedent of a lower dollar amount tax credit for regular non-plug-in hybrids that since ended in 2010.
It was recognized these and other alternative-fuel vehicles were good for American national interests and reasons supporting them were like a multi-legged stool.
It would be correct to say desire to curb controversial and politicized issues like “climate change” were part of it, but despite critics who focus on this to invalidate alternative vehicles, this was not the only reason.
Reasons justifying taxpayer dollars supporting the electrification of transportation were basically three-fold: energy security, economic security, environmental sustainability.
This was how the consumer tax credit for plug-ins – one line in larger bills – was sold to both sides of the legislature once upon a time. Industry stakeholders – automakers, utilities, environmentalists and other interests – weighed in on what has become a measured compromise.
Briefly, “energy security” speaks to curbing dependence on oil – a global, fungible commodity. The U.S. does not have control of the market price of this commodity, and involvement in the Middle East, wars, and now terrorism have been blamed on geopolitical factors arising from this vulnerability.
By contrast, electricity is domestically sourced. It’s been said you will never see a supertanker pulling into port with a load of electricity.
As for “economic” benefit, plug-in cars are seen as new energy technology which nations of Europe, plus China, India, and Asia are also attempting to develop. The idea of America taking a leadership role in a technology with vast potential was appealing to lawmakers who agreed to incentivize the industry and consumers.
And with regards to “environmental” benefit, electrical energy is considered cleaner on a well-to-wheel basis – even when using coal and regulations are seeing the grid getting cleaner every year. So, not only is electricity domestically produced, it can be made by renewable sources like hydro, wind, and solar. Even if “climate change” remains a hot topic, say proponents, the fact that “air pollution” affects lives and entails huge costs is undisputed.
In short, before plug-in cars were castigated before the 2012 elections as the province of one ideological group, it was understood there was something in it for everyone, now, and for future generations. Thus, the up-to $7,500 credit was carried forth from the Bush era into the Obama era.
How The Credit Works
Contrary to any misconceptions out there, the plug-in credit is against one’s taxes upon their own earnings, and does not amount to welfare from other peoples’ money. News of an early Volt owner being harassed by a pickup truck driver asking how he liked the car the pickup driver’s tax dollars helped fund tell of this undercurrent still with us.
The base tax credit is $2,500 and above 5 kilowatt-hours taxpayers may claim on their IRS return $417 per kilowatt-hour not to exceed $5,000. This is how we get the “up-to $7,500.” It’s been an unsubstantiated rumor that General Motors had something to do with this and the cap was effectively 16 kilowatt-hours, the same as the first Chevy Volt. Cars with bigger batteries like the 24-kwh Leaf or 60-85-kwh Model S are still capped at $7,500.
Whatever the back-room talk may have been, it has been benignly stated that there was a “choke point,” and a cap had to be put on it in light of political realities – Congress would not have gone for more, and $7,500 was the negotiated limit.
Further, each manufacturer was allotted a threshold of 200,000 plug-in vehicles it could sell in the U.S., which will take several years, and so far the highest – Nissan and GM – have sold in the mid-70,000 unit range.
According to the IRS, after a carmaker passes 200,000 sales, following that quarter when this occurs, the tax credit phases out over the 15 months following and eventually buyers will not be able to claim a federal credit on that carmaker’s products.
While true the tax credit does deprive the tax base of potential revenues, whether liked or not, myriad tax credits are a reality in the American political landscape that do favor special interests and political ideals. Globally, many other nations are incentivizing plug-in vehicles as well.
For those who disagree consumers should be even able to claim a credit against their own earnings, it has been documented the oil industry takes far more annually directly or indirectly than the entire plug-in tax credit system may cost the U.S. for the duration of the program.
It’s been estimated that the most the present plug-in consumer tax credit may cost federal coffers in lost tax revenues is $15 billion and this assumes that all eligible automakers sell all 200,000 per manufacturer and all consumers claim 100-percent of the $7,500.
This will not happen, as not all consumers are eligible for 100 percent of $7,500. So it’s expected to cost less, but by contrast direct and indirect subsidies to the petroleum industry have been estimated from $10 billion to $52 billion per year.
Further, these dollar amounts do not account for untold billions in costs for “externalities” taxpayers face because of the fossil fuel industry including climate/environmental, health impacts, and more.
Beyond the up-to $10,000 and make-it-a-rebate suggestion by Obama, others including lawmakers, business professors, and ordinary plug-in advocates of all stripes have suggested various other ways to tweak the system for equity and accomplish goals.
A core question from the beginning was what is the U.S. trying to accomplish? The U.S. does not have a unified energy policy. The flip-side of the it’s-not-egalitarian argument is the compromise legislation we now have was not done strictly for consumers, so the notion that we need to make things easier on consumers could be said to be somewhat one-sided.
Really, although consumer interests were considered, it was industry stakeholders who may have had a louder voice in framing the consumer tax credit.
And it does serve them. If you are Nissan or General Motors or Tesla, etc., you can advertise your respective car with a net effective discount lopped off. Your buyers may see benefit to them, and this is true, but you know it benefits you if they buy more of your product.
The idea from the beginning was to give a leg up to relatively expensive battery powered cars so the industry could grow. When H.R. 1424 and later H.R. 1 were written, assumptions of manufacturer battery costs were factored along with need to start educating consumers and marketing these vehicles against a 100-year incumbent – the internal combustion engine wedded to the entrenched petroleum interests.
So, some have said, a point-of-sale rebate, while nice for consumers, was not the only reason, and further, it may not be desirable.
One concern – among too many to document – is the present tax credit may be better than a rebate. A rebate it was said would be more difficult to administer, potentially more expensive therefore, burdensome, and impractical.
If a rebate were proposed, how would that work? Would dealers give the consumer the cash off, then apply to the government for reimbursement? Would the government then need to have a very large pool of money like a cash-for-clunkers program?
Such fund pools have been known to dry up, and it did cross the mind of industry stakeholders that the monies could go away before the mission of getting the industry on its feet was accomplished. By contrast, the up-to $7,500 tax credit which does not sunset lets consumers claim credits from their own earnings – thus no massive fund needed, or large program to manage.
As Things Stand
Whether that argument holds water for you, or more elegant solutions could circumvent and create greater equity, the president is a member of the minority party and the Congress and Senate have bigger fish to fry.
Aside from numerous reports on infighting and other budgetary issues this year, tax reform has been on the table for a few years now. Whether the plug-in credit is reformed before the tax code is overhauled is in doubt, say insiders.
Further, with the fossil fuel industry finding new legs with horizontal drilling, hydraulic fracturing, “energy security” already being declared by some – plus other points of disagreement – many legislators cast a doubtful glance at the present plug-in tax credit.
Proposals to eliminate the federal tax credit have been called for in the course of overhauling the tax code, even as plug-in proponents might ask for more.
It’s been said if the tax credit were cut off, we might still see plug-ins continue, while others have said it could kill if not severely set back the U.S. market which constitutes around three-quarters of 1-percent share of the 16.4-million annual passenger vehicle market.
That the plug-in industry has benefited thus far is unquestioned. That reform would be welcome by some is also true, while even among some plug-in supporters, the idea of needing tax breaks has been called wrong on principle.
Further, automakers, it has been said, have had four years to get going, and California-rules “compliance cars” and slower than hoped for growth is a reality. Aside from a few leaders – notably Tesla, Renault-Nissan, General Motors and Ford being standouts – driving the industry as much as anything are tightening global, federal, and California mpg and CO2 rules.
So, it’s effectively been a whip driving progress as much if not more than the carrot-on-the-stick that is the tax credit.
Really the market is a nuanced multitude of variables with the tax credit being just one. Its help plus other drivers has brought the industry to where at least three if not five automakers could have 200-mile, mid-30s priced battery electric car by 2017. Meanwhile the Volt is the first PEV pending its second-generation, and many global automakers are doing more and momentum is increasing.
Pushed and pulled along against an entrenched oil-based paradigm, the plug-in industry grew last year in the face of declining gas prices, and declining regular hybrid sales.
So, would federal tax credit reform be desirable? Maybe. Or maybe plug-in advocates should be thankful for what they have in a world full of compromises, conflicts of interest, no guarantees of fairness, and politics as usual?
Or maybe not. This discussion could go on and on and there are more points that could be made than the few we’ve merely touched on.