Commentary: Overdue for reform, EV tax credit needs reasonable limits


2019 Chevrolet Bolt EV

2019 Chevrolet Bolt EV

Now that the federal plug-in tax credit has begun to wind down on the U.S.-made Chevrolet Bolt EV, members of Congress propose to do something about it.

Democrats have proposed several bills in Congress to remove the manufacturer-based 200,000-car cap on the credits and extending them for 10 years, and a new proposal by California Democrat Ro Khanna, whose district is home to Tesla's Fremont factory, suggests limiting the credits to American manufacturers (without yet suggesting how it would define what makes a manufacturer "American.") 

The suggestion points to a key flaw in the current tax credit law: At this point it penalizes the most successful American electric-carmakers, Tesla and General Motors, and rewards foreign companies who import plug-in cars to the U.S.

MUST READ: In an ideal world, this is how electric-car tax credits should work

Under the current law, new cars that get some of their range by plugging into an electrical supplyor run on hydrogenget their buyers access to a federal credit of up to $7,500 on whenever they file taxes for that year.

The amount of the credit is determined by the size of the batteries, with lower federal incentives available for plug-in hybrids with smaller batteries—and that's before factoring other state and local incentives. 

The law was passed as part of the Energy Independence and Security Act of 2007. To control costs of the program, however, the credits were limited. Once each automaker sells its first 200,000 plug-in cars, the credits on its cars begin to phase out, while those on other automakers' competitive models continue.

That is the situation GM and Tesla are now facing: effectively being penalized for being early adopters justas battery costs begin to come down and make plug in cars from foreign automakers such as Hyundai, Kia, Volkswagen, and others competitive with gas models.

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The latest Democratic bills in Congress, taking baby steps toward supporting some form of Green New Deal, aim to extend the credits and keep level the playing field for all automakers. Competing proposals from Republican Senators, supported by President Trump, aim to level the playing field by ending the tax credits altogether, expecting electric cars to stand on their own, at present battery costs, versus gasoline vehicles.

That points to an even bigger problem with the current tax-credit structure, however: Not only are domestic automakers losing out to existing large foreign competitors, but new automakers are entering the electric-car market all the time, especially from China: Nio, Byton, Evergrande, Kandi, BYD, Geely, GAC, and others. There are even crowd-funded electric car companies working to bring new models into production (if not necessarily yet to the U.S.), such as Sion and Nobe.

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By eliminating gas engines with their attendant emissions certifications, and replacing them with commodity batteries and motors, electric cars have effectively and dramatically lowered the cost of entry to build cars. Especially as more Chinese and Indian automakers look to enter the lucrative U.S. market, these efforts look likely to expand. And under the current scheme, every new automaker that enters the market will get its own 200,000 tax creditswith virtually no limit on the cost to U.S. taxpayers.

Proposals that would be helpful include those that set an end date on the program, reward rather than penalize early adopters, or possibly set a price limit on how much eligible electric cars can cost. So would efforts to turn the annual tax credits into point-of-sale rebates to lower EV buyers' car payments.

As the country begins to consider what a Green New Deal (or a new round of policies encouraging cleaner cars and power) might look like, it's time to reform the federal Plug-In Vehicle tax credit with an eye toward making it more equitable and convenient, and setting realistic limitsbefore electric car opponents use runaway costs to justify eliminating it before it has accomplished its original mission of getting more Americans into electric cars.

 
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