The Fuse

Don’t Pull the Plug on the EV Tax Credit

by Matt Piotrowski and Paul Ruiz | November 08, 2017

The electric vehicle (EV) tax credit could be on the chopping block in Capitol Hill’s tax reform efforts.

Eliminating the $7,500 federal tax credit for purchases of new EVs may hurt sales at a time they are gaining traction and automakers are making bold plans to further electrify their vehicle mix. Research shows that there is a strong relationship between robust government incentives and sales of EVs, and policies designed to increase use of alternative fuels—such as tax credits for EVs—are an important tool in cutting oil dependence and diversifying the vehicle fleet.

Continuation of the EV incentive program would preserve current growing popularity of EVs and over time help spur a continuous dramatic uptick in EV adoption.

The credit is critical for early market influence. As vehicle manufacturers achieve economies of scale, battery costs fall and more infrastructure is put in place, consumer demand will continue to grow and the credit will eventually not be needed. In the meantime, auto companies have invested tens of billions of dollars in electric drivetrains, and approximately 40 models are now available to consumers. Furthermore, EV manufacturing supports 215,000 American jobs. Pulling the rug out from industry now is the wrong way to go.

Tax credit help support sales

EVs have seen extraordinary growth in recent years. Continuation of the EV incentive program would help preserve current growing popularity of EVs and over time spur a continuous dramatic uptick in EV adoption. Prematurely nixing the tax incentive could undercut consumers’ interest. For instance, after Georgia took away its $5,000 state tax credit and imposed a registration fee on EVs, the number of EV sales in the state plummeted by 80 percent. “Policy support will remain indispensable at least in the medium term for lowering barriers to electric car adoption,” the IEA wrote in its latest annual outlook on EVs, published in June.

Outside the U.S., countries with strong enticements have been successful is bolstering EV sales. In Norway, for instance, where plug-in electric hybrids and battery electric cars have captured roughly 30 percent of market share for new sales, buyers of fully electric cars avoid paying taxes on their purchases. Other European countries have also successfully incentivized EV sales.

U.S. EV sales are currently rising sharply as the number of models increase (now up to 40) and battery range surges. In the third quarter of this year, approximately 52,800 EVs were sold, a 16 percent increase versus the same time in 2016. Total cumulative sales in the U.S. have now reached roughly 700,000 units, with strong sales occurring despite gasoline prices that have averaged below elevated 2011-14 levels.

Automakers make bold plans, increase range

Automakers have made a string of announcements this year with their EV plans, reflecting their willingness to commit to electrification and their confidence that consumers will want to buy EVs. GM announced that it will have two new models in the next 18 months and 20 new ones by 2023. Volvo has promised five new BEV modes from 2019 to 2021. Others have made similar aggressive plans.

A general misconception about EVs is that they are high-end luxury cars. However, a growing number are affordable models available for the average consumer. The Chevrolet Bolt, which has seen impressive sales this year, has a retail price of $37,000, and sells for under $30,000 with the tax credit, making it even more attractive. Despite improvements, EVs’ overall higher purchase price compared to internal combustion engine (ICE) vehicles remains the biggest obstacles for sales. That will eventually change, however. Boston Consulting Group said recently EVs will become cost competitive with ICE cars next decade, and Bloomberg New Energy Finance sees EVs making up more than 50 percent of new car sales by 2040.

Besides price, range has been a deterrent for consumers—but there has been dramatic improvements in this area, too, making battery electric vehicles (BEVs) more appealing to motorists. For instance, the Bolt’s range on one charge is above 200 miles. The average driving range for 2017 EV models is now 140 miles, up from 96 in 2012. At the same time, average costs have fallen considerably with more efficient batteries. The miles per gallon (of gasoline) equivalent (MPGe) used to determine fuel economy of BEVs continues to improve. The graphic below shows the proportional relationship between MPGe and dollars per mile of range. Simply put, consumers are able to choose among a growing variety of models with better battery technology and declining fuel costs.

EV efficiency

EVs critical for energy security

The tax credit is important in helping meet energy security goals.

The tax credit is important in helping meet energy security goals. By precipitating a shift away from petroleum—through demand-side initiatives such as EVs—the U.S. can bolster its national security and insulate the economy from oil price volatility. The necessity for diversity in the automobile fleet is taking on more urgency now that gasoline prices are rising, OPEC is cutting production, and a number of major oil-producing countries are experiencing instability. Today’s market dynamics reflect how prices are ultimately beyond the U.S.’s control: OPEC and other petrostates with large reserves—concentrated political structures and state-run oil companies—dominate the unfree oil market. Some 70 percent of the world’s largest and cheapest oil reserves are controlled by national oil companies. The U.S. has spent $2.5 trillion on imported oil in the last ten years, with $1.6 trillion sent to OPEC members, and spends an estimated $67.5 billion every year on ensuring the security of oil supply lines.

Given the costs of oil dependence, maintaining and reforming the tax credit is of strategic importance to the U.S. The tax credit has been vital in helping EVs gain traction in today’s competitive and transformative car market. Keeping the tax credit would cost the federal government only $200 million over five years, a very small amount considering the numerous benefits that EVs provide.