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Is $7,500 Tax Incentive Enough to Sell Electric Cars?

By Aaron Crowe

The government’s goals for getting consumers to buy more “green” cars is clear — whether it’s electric plug-ins, hybrids or some other type of zero-emission cars.

The Obama administration’s target is to have 1 million plug-in vehicles on the road by 2015. Eight states announced a plan in May to put 3.3 million electric and fuel cell vehicles in drivers’ hands by 2025.

Both goals, however, may be difficult to reach, given that zero-emission sales make up only a tiny fraction of the 15 million to 16 million vehicles sold annually in the U.S., according to a Los Angeles Times story. Global electric vehicle penetration of 1 percent is a respectable number, the Times quoted an analyst as saying, compared to forecasts just a few years ago of 5-10 percent penetration by 2020.

How tax subsidies work

One big way that federal and state governments have tried to increase the sales of electric cars is with tax credits. The bigger the car’s electric battery, the bigger the tax rebate, ranging from a federal subsidy of $2,500 to $7,500.

And cars don’t have to be all-electric to get the subsidy. A hybrid Toyota Prius with a 4 kilowatt hour battery gets a $2,500 federal subsidy. Electric cars with batteries that store 16 kilowatt hours or more of electricity get the full $7,500 rebate; these include the Tesla, Chevrolet Volt, Nissan Leaf, and Ford Focus electric cars.

But is $7,500 enough to get people to buy an electric car? About half of the states in the U.S. also offer tax credits to encourage people to buy an electric car. West Virginia has the largest incentive: $7,500. Georgia offers up to $5,000 and California’s is $2,500.

To claim the tax credit, buyers must use the car. They can’t resell it to claim the tax credit. The car must be new, meaning the buyer of a used electric car won’t get the tax credit. Also, the credit only applies to the first 200,000 plug-in vehicles a manufacturer makes.

Incentives help rich more

There’s also the hassle of paying the full price of the car — or at least qualifying for a loan for the full sales price — before receiving the tax break after you file your taxes. Paying up front for a car with a high price to begin with — the Leaf has an MSRP of $28,980 after the tax rebates are factored in — can be difficult.

“The economics ultimately exclude a large percentage of buyers simply because, even at a discount, hybrid and electric vehicles are still relatively expensive,” says Jonathan Duong, a certified financial planner at Wealth Engineers in Denver.

“In addition, depending on the buyer’s specific tax circumstances, they may or may not be able to capture the full value of the credit on their return,” Duong says. If the entire credit isn’t used during the tax year, it can’t be rolled over to the next year, he says.

“Since the typical buyer of a hybrid or electric tends to be higher income, more affluent consumers, they are more likely to be able to benefit from the credit,” he says. “However, for lower income earners or those with smaller tax bills, the credit may not be all that valuable.”

For someone with a low tax bill, or doesn’t owe any federal income tax, they wouldn’t get a rebate check from the IRS for buying an electric vehicle, Duong says. The most someone can reduce their regular income tax liability is down to zero, he says.

Tax break not equal to lower emissions

One problem with the federal tax rebate policy of giving bigger rebates for cars with bigger electric batteries is that a larger battery doesn’t equate to more emissions reduced, says Jeremy Michalek, an associate professor in the Department of Engineering and Public Policy, and in the Department of Mechanical Engineering, at Carnegie Mellon University in Pittsburgh, PA.

“They’re (tax subsidies) already larger than the monetary benefits that the vehicles offer,” Michalek says.

Increasing the tax benefits won’t increase the emission savings, he says.

“The policy is written as though doubling the size of the battery will double the emissions savings,” Michalek says.

For example, the Chevy Volt’s battery packs with 16 kilowatt hours (kWh) provide about 35 electric miles per charge and receive the full $7,500 federal tax credit. Vehicles with smaller battery packs, such as the Toyota Prius Plug-in Hybrid at 4.4 kWH and 11 electric miles per charge, get $2,500 in credits.

Tripling the subsidy may seem justified at first glance, Michalek co-wrote in policy review of getting the most out of electric vehicle subsidies.

But tripling the range doesn’t mean tripling the amount of gas displaced or emissions reduced, he says. Increasing battery size has diminishing returns, including from more pollution if the electricity used to charge the battery is produced by coal.

“Even in the most optimistic scenarios where vehicles are charged with zero-emission electricity, the larger battery packs offer only comparable or slightly greater net benefits, not double or triple, the authors write.

“U.S. coal is the single largest source of electricity,” Michalek said in a phone interview, adding that gasoline is cleaner than coal. The mix of fuels used to generate electricity is changing in the U.S., with natural gas gaining on coal, according to the U.S. Energy Information Administration.

“If you think of gasoline as the problem, and electricity as clean, then you think electric is the only way to go” with plug-in cars, Michalek says.

A better way to lower carbon emissions, he says, is to have a carbon tax on cars so that the price of gas is raised proportionally to the environmental damage a gas-powered car causes. But that’s an area full of opposition, Michalek says.

“The public’s very resistant to new taxes or taxes on gasoline,” he says.

For now, the best incentive to buy an electric vehicle is $15,000 from federal and state tax subsidies combined that’s offered in West Virginia — a major coal producing state.

 

Aaron Crowe is a journalist who covers the auto industry for CheapCarInsurance.net.