A recent study from researchers at the University of California, Berkeley, found that more than 90 percent of the tax subsidies provided by average Americans for electric vehicles benefit only the top quintile of earners.
The reason is simple: One must purchase one of these high-cost vehicles before being able to claim tax credits worth up to $7,500.
This Robin-Hood-in-reverse policy needs re-examination and revision. Not only shouldn’t a nation’s genuine pursuit of green energy transfer money from the less well-off to the well-to-do, but by subsidizing a luxury niche product, the green energy benefits also remain limited.
Tax subsidies to support policy objectives have a long history in the United States. Controversy has often attended such subsidies, starting with tax benefits to Virginia tobacco farmers in the 17th century, all the way to 20th century sugar crop price protections. Today, we see it in the recent Trans-Pacific Partnership discussions.
This tension naturally arises because the public benefits of these and similar programs must be measured against costs—generally, our taxes or higher prices.
With green car credits, well-intentioned public efforts to support clean energy have strayed into programs that, instead of supporting the spread of clean energy, work to pay wealthy individuals with money collected from average folk.
First, it is unwise policy because few cars are sold, and in turn, “green” benefits are limited. Tesla and its kin remain niche players because a subsidized $80,000 car is just as difficult to buy for an average-income individual as a non-subsidized $90,000 ride. These are not mass-market vehicle products.
Further, while the tax credits at issue are available for other, less costly cars, once manufacturers begin to sell more than a moderate amount of them, the tax subsidy is eliminated.
So, just at the point when the electric car model reaches the mass market, the tax assistance goes away. The incentive to buy green vehicles disappears when they enter the mass market.
The result: We don’t find a lot of electric cars on the road, except in certain well-to-neighborhoods in places like Palo Alto, Calif.
Overall, this “green” policy has merely shifted attention to questions of inequality and unfair income distribution without encouraging the volume of sales that is needed for the desired policy effect.
The policy doesn’t even benefit Tesla and other luxury electric car companies. These are advanced, carefully designed, and, in my view, wonderful vehicles. I want one.
By subsidizing low-volume luxury vehicle production, we alter the normal evolution of products from luxury to mass market and limit growth. U.S. economic history is replete with examples of niche manufacturers transforming their products for mass use.
When Henry Ford started the Ford Motor Company in 1903, automobiles were very expensive, custom-made playthings of the wealthy. Ford’s idea was to make a car that even the employees in his factories could afford. The result was the Model T, an inspired innovation in mass production that transformed of the American economy.
The same is true for the personal computer. Back in the 1980s, IBM entered the nascent market of affordable personal computing instead of remaining solely as a maker of expensive enterprise machines. This transformed the U.S. economy, too.
This credit should be abolished, or at least amended, to encourage high volume sales of electric vehicles for all.
We can accept tax subsidies for costs that we all must bear—child care or health expenses, for example, because they increase the availability of such services to everyone.
But if we tax relatively poorer people to pay relatively rich people to buy advanced cars, we are benefiting only a privileged few, not putting a lot of “green” cars on the road. It really is Robin Hood in reverse.