Three bills in the U.S. Senate are competing to change the federal taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. credit that benefits buyers of electric vehicles. The three bills vary in scope and action, ranging from immediately ending the distortive credit to expanding and extending it for another decade.
Currently, the tax code provides a credit for the first 200,000 qualifying plug-in electric vehicles manufactured by an automaker. The value of the credit ranges from $2,500 up to $7,500 depending on the vehicle specifications, and taxpayers who buy qualifying vehicles may file for the credit with their tax return. When manufacturers have sold more than 200,000 vehicles, the credit begins phasing down. For the first two quarters of the phaseout, a 50 percent credit is allowed, followed by a 25 percent credit in the next two quarters, after which the credit is no longer available.
The Joint Committee on Taxation estimates that under current law, with the 200,000 vehicle cap and phaseout intact, the credit for plug-in electric vehicles will reduce federal revenues by $7.5 billion from 2018 through 2022. In tax year 2016, just 60,245 out of more than 150 million filers claimed the credit, which illustrates the narrowness of this provision. Additionally, the credit is disproportionately claimed by higher-income households.
Option 1: End the credit and impose a highway user feeA user fee is a charge imposed by the government for the primary purpose of covering the cost of providing a service, directly raising funds from the people who benefit from the particular public good or service being provided. A user fee is not a tax, though some taxes may be labeled as user fees or closely resemble them.
Introduced by Senator John Barrasso (R-WY), the Fairness for Every Driver Act moves toward more neutral tax treatment for all vehicles. This bill would end the credit almost immediately, just 30 days after enactment. This would be an improvement; narrowly targeted preferences like this credit are distortive and reduce the efficiency of the tax code. It would also impose a highway user fee on owners of electric vehicles, to be paid when owners file their tax returns.
Generally speaking, the user-pays principle provides the foundation for current infrastructure spending. For example, drivers directly benefit from using highways, and it follows that they should directly pay for them too.
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Most drivers do this when they fill up their car with gasoline, as the federal government levies an 18.4-cent per gallon tax on gasoline and a 24.4-cent per gallon tax on diesel fuel. If you drive 10,000 miles a year in a car that gets 25 miles per gallon, you pay about $74 a year in federal gasoline taxes. These revenues support the Highway Trust Fund, which, for the most part, helps pay for road construction and maintenance.
Because electric vehicles don’t use gasoline, drivers of these vehicles don’t pay into the Highway Trust Fund, even though they benefit from using highways. To remedy this, Sen. Barrasso’s bill would impose user fees on alternative vehicles. These fees would be based on the average fuel consumption used by vehicles in similar classes, so alternative vehicles would pay around the same user fees as other vehicles.
Option 2: Uncap the credit and end it in 2022 (maybe)
The second bill, introduced by Senator Dean Heller (R-NV), would lift the 200,000 vehicle cap on manufacturers and instead would allow the credit to be unlimited until the program would end in 2022. At least two manufacturers have reached or will reach the cap this year and thus their vehicles would not be eligible for the credits beginning in 2020, so this bill would continue delivering the subsidy to these manufacturers who are nearing ineligibility under current law.
Even though the bill schedules the credit to phase out in 2022, one could imagine the scenario where this credit falls into the “extenders” trap. It’s become a nearly annual ritual in Washington for lawmakers to temporarily extend a grab bag of provisions which were originally scheduled to sunset. Most of these provisions, like the plug-in electric vehicle credit, are narrowly targeted benefits that do not meet principles of sound tax policy.
Option 3: Uncap, extend, and make it available at the point of sale
The third bill, the Electric Credit Access Ready at Sale (CARS) Act of 2018, was introduced by seven Democratic senators in September. It would not only eliminate the 200,000 vehicle cap, but also extend the credit through 2028, to encourage cleaner energy and reduce carbon pollution. Additionally, it would make the credit available at the point of sale when an individual purchases the vehicle, rather than waiting until the individual files an income tax return. Another proposed change is that unused portions of the credit could be carried forward up to five years.
This bill is also likely to fall into the extenders trap, and it even proposes extending some of the currently expired preferences for other types of alternative energy.
Ultimately, tax preferences for certain industries are not high on the list of effective tools for addressing negative externalities. Instead, preferences like this credit distort relative prices and consumer choices and reduce the efficiency of the tax system even though there is little to no evidence credits like this actually address externalities.
As such, of the three options currently under consideration in the Senate, the first is the only one which moves in the direction of a more neutral, less distortive tax system.Share