Research & Commentary: The Tesla Tax Credits Have Failed and Should Not Be Continued

Published September 28, 2018

Despite the fact that Tesla tax credits offer no benefits to society and cost billions of dollars, a new bill under consideration in Congress would extend the expensive federal tax credits electric car purchasers receive.

First implemented in 2009, the electric vehicle tax credit allows for consumers purchasing electric vehicles to claim a $7,500 federal tax break. Several electric car manufacturers, most notably Tesla, have used this credit to drive up sales. Current law allows these credits to be used for the first 200,000 vehicles sold by each company, and as several manufacturers are nearing the 200,000 cap, they are calling for elimination of this cap and extension of the tax credit.

The bill, titled the Electric Cars Act of 2018, would extend the tax credit for 10 years and eliminate the manufacturer sales cap. It would also provide electric car purchasers the choice to use the tax credit over a five-year period or to apply the credit at the point of sale. Tax credits for alternative-fuel vehicles and charging infrastructure would also be extended under the bill.

The bill’s primary goal is clear: It is designed to prop up Tesla and the rest of the electric vehicle industry using billions of taxpayer dollars. And contrary to the claims of the bill’s supporters, it will not provide any measurable benefits to the United States.

The bill’s proponents state it would make the United States less dependent on fossil fuels, but this assertion is completely false. Despite the continued massive subsidies of renewable energy sources, such as wind, the U.S. electric grid remains largely dependent on natural gas and coal. In other words, electric vehicles are largely dependent on fossil fuels.

Additionally, the Tesla tax credit provides no measurable environmental benefits. In fact, a May 2018 study from the Manhattan Institute concludes the broad-based adoption of zero-emission vehicles (ZEVs) promoted in this bill will likely increase pollution and environmental costs. “Based on data from the U.S. Energy Information Administration (EIA),” the study notes, “increased reliance on ZEVs will increase overall emissions of sulfur dioxide, oxides of nitrogen, and particulates, compared with the same number of new internal combustion vehicles, even after accounting for emissions from petroleum refineries.”

Furthermore, electric vehicles are vastly more expensive than traditional automobiles. The current starting price for a 2018 Tesla Model S, the most popular model, is $74,500, and the price of the more affordable Chevy Volt starts at $33,220. This is far more expensive than the average gasoline-powered car; the Honda Civic, the most popular car in America in 2017, currently has a starting price of only $18,940. As a result, the majority of people using the tax credit are relatively wealthy, and according to a 2015 study by Severin Borenstein and Lucas W. Davis of the University of California at Berkeley, most energy tax credits have been given to higher-income Americans.

“The bottom three income quintiles have received about 10% of all credits, while the top quintile has received about 60%,” Borenstein and Davis wrote. “The most extreme is the program aimed at electric vehicles, where we find that the top income quintile has received about 90% of all credits.” Another study by the Pacific Research Institute found 79 percent of electric vehicle plug-in tax credits were claimed by households with adjusted gross incomes greater than $100,000.

Electric vehicles have been in existence since at least 1828, 50 years before Karl Benz introduced the first gasoline-powered vehicles on roadways. Thus, contrary to popular belief, the electric vehicles developed during the past two decades are not new, orphan technologies meriting government support to get off the ground. Gasoline-powered cars won out in the marketplace more than 100 years ago because they were, as they are now, comparatively more affordable, powerful, comfortable, reliable, and capable of traveling long distances without needing to be refueled.

The government should never dole out taxpayer money to help the wealthy pay for products they can already afford, but that is precisely what it is happening now with the Tesla tax credit. Extending and expanding the subsidies would be a huge mistake.

Rather than propping up companies like Tesla through crony capitalism and continuing to unfairly support this failing industry using taxpayer money, electric vehicles should be forced to compete in the marketplace.

The following documents examine electric vehicle subsidies in greater detail.

Ten Principles of Energy Policy
In this Legislative Principles booklet, Heartland Institute President Joseph Bast identifies the 10 most important energy issues facing the nation and outlines the energy policy actions that will lead to the highest, most efficient production at the lowest cost to consumers. 

Ten State Solutions to Emerging Issues
This Heartland Institute booklet explores solutions to the top public policy issues facing the states in 2016 and beyond in the areas of budget and taxes, education, energy and environment, health care, and constitutional reform. The solutions identified are proven reform ideas that have garnered significant support among the states and with legislators.

The Distributional Effects of U.S. Clean Energy Tax Credits  
In this study, Severin Borenstein and Lucas Davis examine how clean energy tax credits are used to encourage green energy purchases (electric cars, energy efficient appliances, solar panel installations, etc.). They conclude that many of the credits amount to welfare for the wealthy because the majority of the credits end up in the pockets of high-income Americans.

Costly Subsidies for the Rich: Quantifying the Subsidies Offered to Battery Electric Powered Cars
In this article from the Pacific Research Institute, Wayne Winegarden examines the many  subsidies given to electric car manufacturers and how they represent a giveaway to wealthy Americans. “From  a  distributional  perspective,  most  of  the  benefits  from  EV  subsidies  are  received  by  higher  income  households. Consequently, the subsidization of EVs has some reverse Robin Hood impacts where tax dollars are taken from all households (including lower-income households) and given to wealthier households,” wrote Winegarden.

Short Circuit: The High Cost of Electric Vehicle Subsidies
In this paper, Jonathan Lesser of the Manhattan Institute examines the high costs of electric vehicle subsidies and argues the entire premise for  subsidizing  ZEVs  and  the  infrastructure  needed  to power them—reduced air pollution and lower CO2 emissions—is flawed.

The Tesla Tax Break and Other Green Tax Credits Go Mostly to the Rich – Surprised?
Ronald Bailey of Reason magazine examines who is benefiting the most from electric vehicle credits. Bailey argues the rich are the chief beneficiaries of billions the federal tax credits aimed at encouraging people to buy and install energy-efficient and low-carbon technologies.

Allow Energy Tax Credits to Expire
In this Heritage Foundation Backgrounder by Nicholas Loris and Katie Tubb, the authors examine federal energy tax credits and conclude that they do not make energy less expensive, despite the billions of taxpayer dollars spent on these credits. “The only way to truly level the playing field is to eliminate all targeted subsidies for every energy resource. Congress should allow the energy-related tax credits to expire at the end of the year and eliminate all targeted tax credits for all energy sources and enable free enterprise to drive energy investments,” wrote Loris and Tubb.

Electric Cars: Will Any Auto Company Make Money? 
In this article for, Steve Goreham discusses the lack of market demand for electric vehicles and how manufacturers such as Tesla are having difficulty generating a profit. “Auto makers are in a tough position. Demand for electric cars is small, but governments intend to force auto firms to convert their car lines to electrics. Hundreds of new car models chasing only five percent of the market is a recipe for financial debacle,” wrote Goreham.


Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Environment & Climate News, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

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