General Motors has been in the news recently. With the announcement of the closure of five manufacturing facilities, including GM’s last assembly plant in Canada, and thinning of its white-collar ranks, GM has threatened perhaps 15,000 jobs. More importantly, most of these jobs are well-paying with substantial benefits meaning they are going to be hard to replace.
In response to the GM announcement, President Trump said he wanted to end the $7,500 per vehicle federal tax credit for electric cars. This comes at a crucial time because Congress is considering extending the program.
I have a better idea: let’s cut the program altogether or at least let it expire at its own rate. We probably not only can’t legally use it to punish General Motors, we shouldn’t use it to punish any carmaker.
The program was included in the Energy Improvement and Extension Act of 2008 and amended in the American Recovery and Reinvestment Act of 2009. The tax credit was intended to promote the adoption of alternative power. A person acquiring a new plug-in electric vehicle could get a nonrefundable credit of up to $7,500 toward any taxes they owed for the year they got their new vehicle.
The intent was pure and laudable. The actual results weren’t.
A buyer could either purchase or lease an EV and get the full amount of the credit. Since the credit, which started at $2,500, was based on battery capacity, every new EV qualified for the full $7,500 amount.
The credit is nonrefundable and can’t be carried over. To get the full benefit a person must owe at least $7,500 in tax after all deductions and exemptions. According to the draft income tax tables for 2018, this means that person must have an income of at least $64,150 if they are single and don’t itemize. A married couple filing jointly would have to have taxable income of at least $89,650. Either way, the buyer’s income is above the U.S. median household income.
As a result, the program has turned into a nice benefit for those with higher incomes.
According to various surveys and studies, the average annual income of EV customers is in the range of $175,000 to $199,000. That’s about twice the median household income.
Analysts have also found that about 90% of the new EVs are leased. Leasing turns that green car from a nice perk and bragging item into a bonanza.
Since this discussion was triggered by General Motors, we’ll look at the Chevrolet Bolt. The basic Bolt LT has a sticker price of $37,495, which is slightly more than a base BMW 320i. General Motors offers one of just two options for financing, a zero-interest, 36-month purchase or a 39-month lease with a 32,500-mile allowance. That allowance works out to about 10,000 miles per year.
Assuming no trade-in and no cash up front, the finance payment is $1,042/month. A zero-down lease payment is $564 per month. To qualify for those payments requires very good credit and a pretty good income.
When one factors in the $7,500 tax credit, which also requires a pretty good income, the month finance payment is reduced to about $834. But factoring it into the lease, the monthly payment drops to less than $372.
Nifty shucks, Santa! Not only do you get to show everyone how righteous and environmentally conscious you are, you get to do it for a low, low monthly payment. And, at the end of the lease, if the credit is still available, you can do it all over again.
But only if you are doing well.
Currently there is an end to the gravy train. When a manufacturer has sold 200,000 plug-in EVs, the credits are phased out over two fiscal quarters. Tesla is approaching the end of the line and credits for new vehicles will phase out by the end of 2019. GM will most likely hit its limit before the end of the year and its credits will also begin to disappear.
General Motors really wants the credits to be extended. It’s essentially a generous incentive courtesy of the taxpayers. Lease a car for 39 months with a $7,500 incentive package and the total out-of-pocket (other than title, registration and document fees) comes to about $14,500. In GM’s eyes, that’s free money.
If we make the assumption that 90% of the Chevy Bolts and Volts sold in the first ten months of 2018 were leased and that all the lessees qualified for the tax credit, we have provided a $192 million incentive package for GM in this year alone. The cumulative total as of the end of October was $1.477 billion. That’s just for GM.
Under current state and federal laws, we continue to subsidize well-to-do EV owners even after the sale. Since most road use taxes come from sales of gasoline and diesel fuel, the EV owners get a free ride. Not only that, but those battery-powered cars are heavy. A Bolt, which is close to the same size as a Chevrolet Cruze, weighs as much as an Impala. since weight is one of the primary factors it road wear, the freebie just gets better and better.
I realize that some believe we have to bribe people to buy electric vehicles but we’ve been bribing them for eight years. If states like California want to continue their efforts, that’s fine. They can pay for it. If they want to force a change, they can do like some cities in Europe and fix a date after which gasoline- or diesel-powered vehicles will not be allowed to operate in certain cities.
If we really want to reduce fuel consumption and reduce greenhouse gas emissions quickly there’s a much better way: offer people incentives to get rid of their old junkers. The average age of vehicles on U.S. roads is over eleven years and as new vehicle deliveries per capita continue to decline (they’ve been falling since the 1980s) that average will only get higher. If we can get these people into newer vehicles it would help.
Electric vehicles are the future. Whether they use lithium batteries, solid-state batteries or hydrogen fuel cells, they really are the only feasible answer in the long term. Oil is too valuable as a chemical to just keep on burning it.
But the change is going to take time: it could easily be fifty years before the last petroleum-powered vehicle is relegated to a museum or scrap yard.
We need to make more practical choices for the shorter term, while the transition is taking place.
Note: Most of my calculations are of the back-of-a-napkin variety, so don’t accept them as gospel. They are based on real-world data and information from General Motors, the Internal Revenue Service and other sources.