Earlier this week, both the House and Senate passed measures establishing generous tax credits for electric plug-in cars. The Senate plan gives consumers a credit of up to $7,500 for the purchase of a plug-in car, while the House plan offers consumers a credit of up to $5,000. Under both plans, the value of the credit increases with the battery capacity of the vehicle, meaning that more efficient cars receive larger tax credits.
Economists tend to scoff at the idea of offering tax credits for alternative fuel vehicles, instead advocating for reforms that incorporate the societal costs from energy consumption (e.g. pollution) into the price paid by consumers. For example, several economists, from Greg Mankiw to Robert Frank, have supported an increase in the gas tax. The problem with raising the gas tax is that it's not realistic; not in this political environment at least, with politicians proposing to cut gas taxes, not raise them. In the long-run, a higher gas tax might serve to stimulate demand for electric cars; in the short run, a higher gas tax is simply a political impossibility.
Given political constraints on raising energy prices, tax credits for plug-ins are a worthy policy to help reduce our nation's oil consumption. Prior studies indicate that tax incentives can be an effective means of stimulating demand for alternative fuel vehicles. One recent study examined the effect of state tax incentives on the demand for hybrid cars and found that the existence of an income tax credit raised sales by 13 percent. Another study of the federal hybrid tax credit found that most of the value of the hybrid tax credit was passed-on to consumers, indicating that the credit is not just a windfall tax break for carmakers.
Still, the plans passed by the House and Senate are imperfect, repeating some of the mistakes incorporated in the design of the existing tax credit for hybrid vehicles. Under both plans, the credit is non-refundable, meaning that millions of taxpayers won't be able to take full advantage of the credit. Also, the credit phase-out in the House bill—which disqualifies cars produced by a certain manufacturer after the manufacturer has sold 60,000 units—means that the most popular (and likely most fuel efficient) cars will quickly be ineligible for tax credits.
Electric plug-in cars are coming, perhaps as soon as 2010. Let's hope there's a tax credit waiting when they roll off the assembly line.
