Last Update: July 2, 2015
The EV Price Premium is covered, in part, by tax credits or rebates handed out by governments. This fact muddies the waters of the cost of ownership comparison we’re studying in this book. However, tax incentives are something which exist, and which we must carefully study.
The theory is that tax incentives help defray the electric vehicle price premium, which should help the adoption rate.
At the same time there’s lots of discussion – especially during the 2012 election year – that the government has no role in “picking winners or losers” in the market, and shouldn’t be giving tax incentives for electric cars. As we head into the 2016 election year, that discussion should heat up once again.
We’ll include tax credits in paying for the EV Price Premium. But, we have to discuss whether this is an appropriate use of public funds. Are the incentives necessary? Governments are putting government resources on the line to promote electric cars. Why?
The belief is that we all need more electric vehicles on the road. Recognizing the EV Price Premium as a barrier, governments around the world have enacted tax incentives, and other incentives, to lower the effective price.
In case you aren’t patient enough to read the policy debate below — In the U.S. the Federal Tax Credit for electric car purchases is based on battery pack size, and maxes out at $7,500. Several states offer either tax credits or direct rebates. In California the rebate maxes out at $2,500.
Electric Vehicles as “Common Good” – The role of Government is to promote the common good
Before we get to the education for prospective electric vehicle owners, let’s go over the policy debate.
A primary Government responsibility promoting the common good. In terms of electric vehicle adoption, the common good being served is ending negative environmental and climate damage coming from fossil fuel consumption, and ending economic risk as fossil fuel supplies become ever scarcer thanks to peak oil effects.
This concept of government promoting the common welfare is nothing new. I didn’t make this up. It appears in the constitutions of several countries around the world. In the U.S. constitution the concept appears in the Preamble: “We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.” It also appears in the Tax and Spending clause: “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.”
Hence, tax credits are a legitimate government action, when used to promote the general welfare. It’s flatly incorrect to say governments should not enact tax credits. The US Constitution says we can and should do so.
There is a legitimate argument over which tax credits do or do not promote the general welfare. That’s the debate we should be having.
For example, what form of general welfare was promoted by the Hummer Tax Break? (Section 179 of the US tax code has been abused by many to buy expensive SUV’s and get a $25,000 or more tax break)
Electrified vehicles adoption is a high priority, because they’ll make a big across-the-board positive impact. Here’s a few examples of how shifting to electrified vehicles promotes the common good:
- Delay climate change from lower fossil fuel consumption
- Reduce release of other toxic chemicals into environment from lower fossil fuel consumption
- No need for wars in oil rich countries to ensure access to oil fields by western oil companies
- Avoid global economic downfall as oil supplies begin shrinking due to peak oil consequences
- Electricity, as a domestically produced resource, is under our control rather than the control of foreign powers, enhancing energy security
All those positive benefits, and more, come about through shifting the vehicle fleet to operate on electricity rather than fossil fuels. The problem with crude oil is that it’s highly toxic, fossil fuel consumption contributes to climate change, oil supplies are beginning to decline (peak oil), and oil supplies are controlled by countries that are hostile to the Western countries (because of decades of manipulation by the Western countries).
What good can come from continuing fossil fuel consumption? None. Great good can come from switching away from fossil fuels.
Don’t EV tax incentives just help the rich?
Let’s stay with the policy debate to go over one of the big objections against electric vehicle tax credits. It’s undeniably true that some of the electric vehicles being sold are very expensive. Expensive as in luxury car prices. We’re not talking the MSRP difference between the gasoline and electric versions of the Chevy Spark, but the out-of-sight price for luxury EV’s like the Tesla Model S.
One factoid the naysayers harp on is that the Chevy Volt can only be bought by wealthy buyers whose income is at least $170,000 per year. Supposedly.
Somewhere between that and the $100,000 luxury electric cars, the “taxpayer funded subsidy” of electric vehicles is primarily benefiting the rich and wealthy. Supposedly.
This line of thinking is primarily pushed by the right-wingers who want to destroy the adoption of electric cars. It’s the same group who oppose every word that comes out of President Obama’s mouth, even when he’s clearly speaking truthfully, and even when he’s proposing their own policies.
That alone makes one want to dismiss the “tax credits benefitting only the rich” objection out of hand, but there is a truth to be pondered. Because electrified cars do have a price premium, their MSRP is well above what the average consumer can buy. The average joe can’t afford a $35,000 car, making even the affordable electric cars affordable only to those who are better off than average.
According to a March 2014 post on Autoblog, the average price of new vehicles in 2013 was $32,086, but in most areas of the country the average consumer cannot afford average price cars. Autoblog claimed the rule of thumb is the price of a new car should be less than 20% of your take-home pay, while on the Motley Fool website, they claimed a car should cost less than 10% of household income. At the same time in most of the U.S. the average person can only afford a $20,000 car, according to both those articles. Outside the question of whether or not electrified cars are affordable, isn’t there a bigger issue about the cultural inequality signified by the fact that the average price for cars is well above what the average person can afford?
The typical price of the affordable electric cars starts above $30,000 MSRP. By the rule of thumb, a $30,000 MSRP car should require the purchaser have a $150,000 income, which is well above the average income. Hence, almost all electric cars aren’t affordable for most people. Maybe the argument that electric cars are currently only for the wealthy has a sparkle of truth?
Tax breaks even the playing field, however, by lowering the price. That $35,000 MSRP electric car becomes a $25,000 electric car after those tax breaks, and after other incentives its price is even lower. A $25,000 car is still on the pricey end but is closer to affordability for the average car buyer, requiring a $125,000 yearly income.
Taking the same rule of thumb, someone buying a $100,000 Tesla Model S had better be earning $500,000 to $1 million. It’s hard to argue that someone earning that much really needs a $7,500 tax break. But “fairness” questions spring up in my head, that if one person can get that tax break then why not this rich person?
Governments incentivize other things with tax breaks
We have to remember that Governments routinely grant tax breaks for some things and not for others. It’s not like the tax breaks for electric cars was invented out of the blue. There’s a long list of tax breaks in the U.S. One of the most common is the mortgage interest tax deduction. Why is mortgage interest tax deductible and other interest payments are not? The government thinks widespread home ownership is good for the general welfare of us all?
The IRS website has the definitive list of U.S. Federal tax credits. US State governments have their own tax credits, as do every government around the world.
- The Earned Income Tax Credit helps those with low incomes, various tax credits are available for those with children, and so on.
- The Residential Renewable Energy Tax Credit applies to solar photovoltaic systems, solar heating systems and even fuel cell systems installed in a home. It covers 30% of qualified expenses.
- Other tax credits exist for energy efficiency improvements, some of which are currently expired, and applies to energy efficiency improvements in the building envelope of existing homes and for the purchase of high-efficiency heating, cooling and water-heating equipment.
Each tax credit “costs” the government money, according to one line of reasoning. What’s actually happening is the government forgoes collecting some tax revenue it would otherwise receive, and in exchange the tax payer does something which earns the tax credit.
Politicians like to describe this as an “investment”. In some cases the payoff from a tax credit may be revenue from some other source. For example governments routinely hand out tax credits to businesses to incentivize locating a factory in their territory. The government doesn’t collect that tax revenue, but might make it back from increased income taxes from new workers with new jobs, or from sales taxes on the stuff manufactured by the factory.
Hummer tax break
Not all tax credits have a worthy purpose that serve the common good. It would be naïve to think the government always serves the common good. The daily news is full of stories about government officials who harm the common good after getting into cahoots with whomever for whatever payoff.
An example is what used to be called the Hummer Tax Loophole. At one time the Section 179 tax deduction for businesses allowed a business to write off the cost of large SUV’s, like Hummers. The tax deduction has since been rewritten to limit its use for business vehicles. Section 179 allows businesses to deduct the full purchase price of qualifying equipment or software purchases from gross income.
Sample electric vehicle tax incentives in the U.S. and elsewhere
The Wikipedia has what looks like a comprehensive of all electrified vehicle tax credits around the globe. Here’s a few:
- China: ~US$9,281 in June 2011 for EV’s, ~US$7,634 in June 2011 for PHEV’s
- Austria: Exempt from fuel consumption tax, and monthly vehicle tax
- Belgium: 30% of purchase price (including VAT) of BEV’s, but PHEV’s get no tax break
- Norway: BEV’s are completely exempt from all non-recurring vehicle fees, PHEV’s are not eligible.
- Romania: Government grant of 25% of the price of a new electric car (max. €5,000).
- USA: Federal government tax credit of up to $7,500 for either BEV or PHEV’s based on battery pack size. Some states offer additional credits. The total in California is $10,000 thanks to a $2,500 rebate program.
In all cases the car dealership should take care of the rebate or tax credit process.
Rebates and tax credits
In some cases the government gives a tax credit, and in other cases it gives a rebate. The difference is in when and how the money arrives in the buyers pocket.
A tax credit is money they don’t have to pay at tax time. By the American tax calendar, an electric car purchase in January doesn’t help the buyer until they pay their taxes the following year, by April 15. Tax credits are a delayed benefit, rather than being given at the time of purchase.
A rebate, however, is payable immediately with the government writing a check to the car buyer. Some governments forgo purchase taxes on the vehicle, another way to the directly benefit the car buyer at the time of purchase.
Tax incentives when leasing an EV
In the U.S. the federal plug-in car tax credit is given to the purchaser of the vehicle. A leased vehicle is not purchased by the leasor, but instead it is the leasing company which purchases the vehicle. Hence, the leasing company gets the tax break, not the leasor. How, then, does the leasor get the benefit of the tax break? It’s up to the leasor to carefully make sure the leasing company adds the tax credit benefit to the lease terms. By now, in early 2015, the normal practice is to do so but it always pays to make sure you understand the lease terms.
Other non-monetary incentives
While these aren’t tax credits, governments can and do offer other incentives that don’t involve money.
The most obvious is that in California and certain other localities, plug-in car drivers can drive solo in high occupancy vehicle lanes. These lanes are usually meant to reduce traffic congestion, and are meant for cars with two or more passengers. Access to the high occupancy lane (HOV lane) means a faster commute, which is a big bonus during commute hours in crowded urban areas. It’s a big benefit for a solo driver to have access to that lane, and some of the car companies really push this benefit in advertising.
The Tesla Motors “True Cost of Ownership” calculator values this incentive by asking how much your time is worth. For example, the pay rate in your job. If you save 10 minutes each day in commuting time each day, that’s nearly an hour a week. By Tesla’s valuation, 10 minutes a day at $50 an hour adds up to $167 per month in economic benefit, which didn’t cost the government a dime.
We can see that tax incentives are a legitimate government action, especially when coupled with a result which serves the common good.
Electric cars sure look like gizmos which would, if adopted widely, produce hugely positive benefits for everyone. That makes their adoption something which serves the common good.
Like so many early stage technologies, tax incentives are a way to ease the price pain. Eventually the price will fall thanks to technology improvements and economies of mass production scale. Today, in January 2015, the automakers are promising a price breakthrough in the 2017 time frame.