Governments use a variety of tax breaks to help shape their citizens’ actions.
In addition to the perpetual debate as to whether this is good or bad public policy, there’s also the matter of which tax benefits should be used.
When it comes to electric vehicle (EV) purchases, a recent study found that those interested in the alternative fuel autos prefer rebates to existing tax credits.
Plus, the different financial reward method would be more cost effective for Uncle Sam.
Pay then claim credit: Current federal tax law requires an EV buyer to pay full price for the vehicle. Then when buyers file their tax returns with the Internal Revenue Service for the year in which they purchased and put the EV into use, they can claim a federal tax credit.
Depending on the make and model, the EV credit could be as much as $7,500.
However, a George Washington (GW) University study found that changing how the EV incentive is given also changes how much potential buyers value it.
In fact, the GW School of Engineering and Applied Science research, funded by the Alfred P. Sloan Foundation and published earlier this month in the journal Environmental Research Letters, discovered that the current federal tax credit is the least-valued by car buyers.
Inequitable EV tax benefit: “The current federal electric vehicle tax scheme is a pain,” said John Helveston, an assistant professor of engineering management and systems engineering and co-author on the study.
“First of all, you have to have money. You have to be wealthy enough to buy the whole car and then wait for your tax-break kickback in April,” he added.
Wealthier buyers are the ones who are more likely to be able to wait for the tax credit. If you can’t afford to buy the EV in the first place, then the credit is worthless.
“Our study shows that an immediate rebate at the point of sale would be more equitable and potentially more effective in broadening the buying market for electric vehicles,” Helveston said.
Cash up front more valuable: The GW study showed that car buyers overwhelmingly preferred an immediate rebate provided at the point of sale.
For the same subsidy amount, buyers valued the rebate by $1,450 more than a tax credit. This valuation was nearly double for lower-income households, used vehicle buyers, and buyers with lower budgets.
The researchers also found that changing the perceived value of an incentive affects how much money the federal government can offer for the incentive to still be effective.
“If you gave the incentive to car buyers as cash on the hood, our study found that you could lower the subsidy by almost $1,500. That’s how much people value immediacy,” said Laura Roberson, a GW engineering management and systems engineering Ph.D. student and lead author of the study.
“So $7,500 in April when I file taxes is the same to me as $6,000 if you gave me that money at the point of sale,” Roberson said. “That’s a huge difference in valuation.”
Switch would cost Treasury less: Overall, the GW study found that potential EV buyers overwhelmingly preferred immediate rebates.
The study’s participants on average valued immediate rebates as being worth $580, $1,450, and $2,630 more than sales tax exemptions, tax credits, or tax deductions, respectively.
Based on those consumer preferences, the study indicates that in addition to attracting more EV buyers, a different reward mechanism could have been more cost-effective for Uncle Sam.
The research team estimates that on average, the U.S. Treasury could have saved $2 billion, or $1,440 per electric vehicle sold, if the federal subsidy available between 2011 and 2019 had been delivered as an immediate rebate instead of a tax credit.
You also might find these items of interest:
- Electric vehicle tax credits favor the wealthy
- Automakers seek end to EV tax credit sales cap
- Forget gas tax holidays. EVs are a legal way to evade the tax
- IRS let up to $83 million in improper EV tax credits slip through, says watchdog report
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