General Motors’ recent announcement to slash its workforce by 15 percent has drawn bipartisan backlash, including from President Trump, who threatened to do away with a tax credit for electric vehicles that benefits GM. While it shouldn’t require a notice that the auto industry doesn’t need these subsidies, the president is right to question the need for such a credit. Even with last year’s passage of pro-growth, comprehensive tax reform, problems still exist with the tax code. To this day, far too many special interest carve-outs, such as the Electric Vehicle Tax Credit, remain.
The EVTC was established in 2005 as a way to encourage consumers to switch to more energy-efficient transportation alternatives. Now, it’s an unneeded tax break for the wealthiest Americans that distorts the automobile market. Depending on the specifications of the car, consumers are eligible for up to a $7,500 tax credit to help offset the high price of their purchase. Now that demand for electric vehicles has outstripped supply, the federal government no longer needs to be incentivizing these purchases.
Taxpayers should be cautious of lawmakers advocating for tax credits for a specific type of product, as politicians will often use the tax code to distort the market and skew consumer behavior toward certain goods. Sound tax policy requires the code to be neutral and fair, but when government arbitrarily picks favorites, as it does with electric vehicles, it gives these producers an unfair competitive edge. Producers should be able to create goods that are able to compete by their own merits, not with government’s thumb on the scale.
Ongoing efforts by some members of Congress to extend the EVTC should concern all taxpayers, including Democrats, because nearly 80 percent of the credit dollars benefit households that have an income greater than $100,000. If policymakers are serious about having a tax code that promotes fairness, they should support letting it expire. Considering the Joint Committee on Taxation estimates this credit reduces federal revenues by $7.5 billion, that is money that could be put to better use than helping the wealthy purchase an expensive new car.
This tax credit is unique, as each electric vehicle manufacturer is allowed to sell up to 200,000 plug-in electric vehicles before the credit begins to phase out. Tesla, the largest electric vehicle manufacturer in the U.S., has already crossed the threshold, and GM is expected to also hit the 200,000 mark before the year is out.
Given that the EVTC distorts the market through handouts to the very wealthy, its elimination was a top target by the drafters of the 2017 tax reform legislation. Unfortunately, the credit remained intact following tax reform, and now there are a trio of competing Senate bills that would amend the credit. One proposal by Sen. Dean Heller, R-Nev., would eliminate the manufacturer cap and replace it with a sunset date of 2022. Unfortunately, as we’ve seen far too often in Washington, lawmakers will typically just extend tax provisions rather than allowing them to expire. Another proposal, introduced by Senate Democrats, also eliminates the manufacturer cap, but it extends the credit until 2028 and allows any unused credits to be carried forward for an additional five years.
Uncapping the manufacturer credit would likely create more problems in the future. Instead, lawmakers should look to wind down this tax credit quickly. For instance, a bill by Sen. John Barrasso, R-Wyo., would immediately eliminate the credit and establish a user fee for electric vehicle drivers. His proposal deserves consideration as Congress works toward a solution in which all drivers contribute to our nation’s infrastructure needs in a fair and equitable manner.
With a number of automakers hitting their EVTC caps, it’s time for lawmakers to re-examine the viability of the provision. Proponents of the EVTC will argue that without the credit, purchasing electric vehicles would be less attractive. But by allowing the elimination of this tax credit, automakers will be incentivized to innovate to produce cars that are affordable and can compete with their gasoline-powered counterparts. A level playing field in a free market economy is the best way to help car buyers and manufacturers alike.
Thomas Aiello is a policy and government affairs associate with the National Taxpayers Union.
