Tax credits on electric vehicle purchases seem to benefit consumers directly. But the reality is more complex in states that also have zero-emissions vehicle standards.
Buying an electric vehicle (EV) can entitle you to a federal tax credit of up to $7,500 and possibly a few thousand extra dollars from your state, depending on where you live. While the subsidies are set to phase out as automakers reach sales targets, recent proposals could extend the subsidies through the 2020s.
Federal and state taxpayers foot the bill for the subsidies, but who actually benefits from them? This may seem like a silly question—EV buyers do, right? But in fact, most of those subsidies in the short term go to vehicle manufacturers and buyers of vehicles that run on gasoline or diesel fuel. How can that be?
About two-thirds of the nation’s EVs are sold in states that participate in the Zero Emission Vehicle (ZEV) program. California created the program, and 11 other states have joined. The program requires manufacturers to hit a certain market share for EVs each year. The required share was about 6 percent in 2020 and will increase to 15 percent by 2025.
To see how these subsidies affect EV prices, consider a hypothetical world in which California and the 11 other states run the ZEV program, but in which no EV subsidies exist. In this case, automakers can introduce more types of EVs to the market, and they can discount the prices of EVs relative to non-electric alternatives. For example, if Nissan cuts the price of the Leaf by $3,000, Leaf sales might increase by 10–20 percent.
But what happens if the federal government offers a $7,500 tax credit and the ZEV program remains in place? The federal tax credit increases consumer interest in EVs, which allows manufacturers to raise EV prices. For the 70 percent of EVs that are sold in ZEV states, the tax credit affects vehicle prices, but not sales, since automakers often meet, but rarely exceed, the ZEV requirement. Many manufacturers comply by purchasing credits from the most successful EV automakers like Tesla, instead, because they don’t sell enough EVs on their own. In other words, offering a tax credit of $7,500 functionally results in ZEV prices that are $7,500 higher than they would be otherwise. This means that automakers capture the entire benefit of the tax credit.
Note that some caveats apply. For example, some plug-in vehicles don’t qualify for the full tax credit, actual price changes may vary across the market, and even more complex interactions between the ZEV program and federal greenhouse gas standards may exist. And of course, my observations here apply only to EVs sold in the ZEV states. For EVs sold in other states, EV consumers would get some of the benefit of the tax credit—that is, prices would increase by less than the full EV subsidy.
Another nuance is that the tax credit actually reduces the price of vehicles that run on gasoline or diesel fuel. As I noted above, ZEV leads automakers to cut EV prices as a strategy to boost sales, but at the same time, automakers increase prices of non-electric vehicles to further push consumers toward purchasing EVs. The tax credit makes it easier for the automaker to comply with the ZEV requirement, meaning that automakers don’t have to raise prices of non-electric vehicles by as much.
Equity concerns have surfaced amid recent discussions about who would benefit from extending and expanding the tax credits. In the early years of the EV market, EV buyers tended to have higher incomes than typical new-vehicle buyers. But more recently, the household income of EV buyers has been fairly similar to that of households that buy all types of new vehicles. Nonetheless, the typical new-vehicle buyer has a household income about 40 percent higher than the typical US household, and these subsidies do benefit high-income households more than low-income households.
I should also note that benefiting manufacturers isn’t necessarily a bad thing. In fact, automakers need the incentives to keep investing in technology until the technology becomes profitable. In the long term, subsidies can hasten the transition to EVs and substantially reduce greenhouse gas emissions. But the short term is a different story. As long as the ZEV program is driving market shares in many states, tax credits aren’t helping households directly—nor are they helping all households equitably—across much of the country.
This article also appears on the University of Maryland’s Transportation Economics and Policy Blog, which is supported in part by funding through the Maryland Transportation Institute.