Congress is finishing up its last scheduled week before the Christmas holiday sends staffers, lobbyists, and members (both naughty and nice) scurrying home. The smart money is counting on a brief government shutdown, as well as the tax writers punting on some must-pass “tax extenders” to early in the New Year. Some lobbyists, however, are hoping congressional Santa Clauses tuck a brand new tax provision under the tree, an electric car tax credit extender, and that a Christmas miracle will deliver it just in time for the holidays.
If all this sounds familiar, it should. There has been an electric vehicle tax credit in the code since 2010. Auto manufacturers track how many electric cars they sell. The first 200,000 such cars sold by any manufacturer gets the best tax treatment: the purchaser can claim a tax credit of up to $7,500 on their tax return. Once the 200,000 sale mark is hit, the tax credit phases down for that manufacturer’s electric cars until it goes away entirely. The idea is to give the manufacturer an incentive to sell cars via a buyer tax credit, but when the sales line is mature, the tax credit sunsets. We’ve now arrived at that point in the life of this tax credit.
Tesla (owned by the liberal green billionaire Elon Musk) has already hit the 200,000 sales mark, as has General Motors. They will be followed in short order by Nissan, Ford, and Toyota. For these manufacturers, the natural lifecycle of the tax credit should mean that sales beyond the 200,000 car limit qualify for a lesser and lesser tax credit until the credit phases away for good.
[Also read: Trump blasts General Motors for move toward electric vehicles]
Some of these manufacturers are asking Congress to uncap the 200,000-electric vehicle figure. In exchange, they want the newly-uncapped credit to be a brand new tax extender, one which will supposedly expire. Since tax extenders are routinely reauthorized year to year by Congress, though, what they are really asking for is an uncapped electric vehicle tax credit which is de facto permanent tax law.
That would obviously benefit Tesla and General Motors first, but the constituency for the uncapped electric vehicle credit would only grow as more and more auto manufacturers hit the old capped figure and don’t want to go back to a world with a 200,000-car limit on the full credit. The pressure to extend the “temporary” uncapped electric vehicle tax credit would get bigger every year, and the credit itself would be with us forever, on every plug-in electric car sold.
Why is that a bad thing? Tax cuts are good, but not all tax cuts are created equal. A basic tenet of tax policy is that the tax code should not pick winners and losers. That’s precisely what’s happening here with the electric vehicle credit (and that’s with the 200,000 cap). If you buy an electric vehicle and I buy a normal car, the government is essentially giving you $7,500 to help you buy it and is giving me nothing.
You’re the winner, and I’m the loser.
The electric vehicle tax credit is also skewed toward high-income households. According to the IRS Statistics of Income division, 57,000 Americans claimed the electric vehicle credit in 2015, the latest available year. Of those, nearly 45,000 made more than $100,000 that year. That means almost 80 percent of the benefit from the tax credit is going to six-figure households. Nearly half the claimants made more than $200,000 in 2015. There were even 354 savvy folks who claimed the electric vehicle credit while making $10,000,000 or more that year. This is truly tax cuts for the rich at work.
It makes no sense for the IRS to give rich people living in California (where most of these vehicles are sold) tax credits to buy an expensive electric car they can clearly afford on their own. As the Tax Foundation, the Heritage Foundation, and others have pointed out, there are far better ways for the Congress to make tax policy. A much smarter use of political and fiscal capital would be to make the 100 percent full expensing “bonus depreciation” provision of the Tax Cuts and Jobs Act of 2017 permanent.
Under “bonus depreciation” a company (like a car manufacturer, for example) can immediately deduct (“expense” in tax parlance) the full cost of new equipment placed in service. Without bonus depreciation, the same company would have to slowly deduct (“depreciate”) the new piece of equipment over five, seven, or even 20 years. According to the Tax Foundation, making 100 percent bonus depreciation permanent would increase the size of the economy and wages by nearly 1 percent and create more than 172,000 full-time jobs. An economy 1 percent bigger this year alone would mean an additional $200 billion of income, or more than $600 for every man, woman, and child in America.
Everyone likes getting shiny new toys like electric cars under their Christmas tree. But Congress ought to channel their inner Scrooge when it comes to the electric car tax credit boondoggle.
Ryan Ellis (@RyanLEllis) is president of the Center for a Free Economy.
