Recently the news broke that US Senate considers doing more to help electric vehicle adoptionwhich is a great good.
According to a summary from Schumer’s office, the agreement between Senate Majority Leader Chuck Schumer and Democratic Senator Joe Manchin includes an extension of the current $7,500 electric vehicle tax credit, as well as a new $10 investment tax credit. billion to establish clean-tech manufacturing facilities . The deal also includes a brand new $4,000 tax credit for used electric vehicles and other new tax credits and subsidies for automakers to convert factories to produce greener cars.
Before we get too excited, we should also keep in mind that news of deals in the Senate doesn’t mean anything will be passed into law for sure. We should not forget that in 2017, President Joe Biden proposed increasing the federal tax credit for electric vehicles to $12,500 per vehicle — of which $4,500 would be available for union-made cars — and to limit a limit of 200,000 vehicles per manufacturer. to levy on the $7,500 credit, but that never happened.
There were several other things in the bill for EV drivers and EV production, but what I want to focus on in this article is the tax credit issue, especially as we’re trying to get middle- and lower-income people to buy EVs. The problem is that tax credits are just not as useful as wealthier people think.
What studies show
A few weeks ago, we had a story from George Washington University who told us about a study on this topic. The results? Basically what anyone with lower incomes and little or no federal tax burden would tell you: that rebates (or money directly toward the purchase of a car) would actually be helpful. In fact, an instant discount is so much more useful that you can give a smaller discount and still get people to buy the EV.
“If you gave car buyers an incentive like cash on the hood, our research found that you could cut the subsidy by nearly $1,500. That’s how much people value immediacy,” said Laura Roberson, an engineering PhD student. management and systems engineering at GW and lead author of the study.”So $7,500 in April when I file tax returns to me is the same as $6,000 if you give me that money at the point of sale. That is a huge difference in appreciation.”
Why this is
If you’re a taxpayer, the idea of having a smaller tax bill next year sounds appealing. The vehicle’s retail price won’t go down, but you probably aren’t in a position where it’s not a big deal to pay a few extra dollars each month for the value of that tax credit.
But we must remember that by 2021, 57% of US tax applicants ultimately owed nothing. In addition, many filers with the Earned Income Credit and other refundable tax credits get a “tax refund” that isn’t actually a refund, but is money from the federal government that they haven’t paid during the year. This varies by income, the number of children you claim and other factors.
So for more than half of the people filing taxes in the United States, a tax credit would mean very little to them. Instead of “getting $7,500 at the end of the year” as a car salesman would tell you, the reality is that it could get them a few thousand dollars in some cases, or make them get back less in others. of earned income. . It’s a complex matter that computer software is hard to get right, and it’s not easy for a person to predict.
Then there are a lot of people who pay something but owe nothing close to $7,500. For that part of the population, you ultimately only get a partial benefit from the tax credit.
The only people who actually get the full benefit of such a tax credit are probably the top 25% or so of American filers, so we end up with exactly what Republicans often accuse tax credits of doing: giving money to the rich to get nice cars. . Adding purchase price caps means that people who actually take advantage of the tax credits are less interested in EVs, and adding income caps to fix this could only create a small “donut hole” of people actually getting some benefit from the credits.
The easy fix would be to change the tax credit so that it has an income cap and is refundable so that low-income families can get that $7,500 at the end of the year, but that’s still not super convenient. Why? Because you sign up for a higher car payment today, your household budget will start to hit in 45 days, while the money won’t show up until next year. Even if you put that money into the car loan, it wouldn’t lower your payment (the loan would just end earlier).
Discounts, especially “point of sale discounts,” have the advantage of making the car cheaper to buy and easier to approve for a loan. This would bring the maximum benefit to those with lower incomes and could be done at lower amounts. More importantly, if the credit is applied to the car as a down payment, it greatly increases the chances of those with bad credit actually buying an EV rather than settling for a much cheaper gas-powered beater.
One Thing the Senate Needs to Watch Out for: Dealers Swallowing the Discounts
When last year they proposed extending tax credits or giving discounts, I warned readers that unscrupulous dealers would try to eat the tax credit instead of letting buyers get a lower price. With what I’ve seen during chip shortages and other supply chain issues, dealers have only gotten worse about this behavior.
How does this work? The dealer simply increases the price of new cars with “market adjustments” and “protection packs” that are more like a protection racket than a service plan. But hey! See how much you get with the tax credit!
This can be solved by only allowing dealers to sell the car at the suggested retail price, minus the POS discount. Anything higher, and the dealer won’t get his check from the federal government. That would solve that problem right away, but senators should be warned about that.
Featured Image: The US Capitol Building, by the US Architect of the Capitol (Public Domain)
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