Giving the Rich a Tax Break on Electric Cars Creates $1 of Environmental Benefit for Every $304 Spent

February 3, 2014

Amid the talk about closing tax loopholes, there is one loophole some in Olympia want to protect in the name of the environment. Currently, Washington state waives the sales tax on electric vehicles, like the $90,000 Tesla Model S.

The goal of this loophole is to reduce carbon emissions. The impact of the loophole, however, is probably very small and wastes huge amounts of money for tiny environmental benefit.

Here, I look at two scenarios: the Nissan Leaf base model at $28,800 and the Tesla Model S model at $85,900. Compared to the average car and assuming a (very generous) 10-year life of the vehicle, an electric car will use 4,210 fewer gallons over its lifetime than a comparable average car.

The key question is "How many electric cars were purchased due to the sales tax exemption?" I use three estimates.

The first is from the "Cash for Clunkers" experience, where about 36 percent of the cars purchased were due to the incentive (other purchases were simply moved up to take advantage of the free money). Another estimate comes from a study in Canada by Chandra, Gulati, and Kandlikar of tax incentives for hybrids. It finds 26 percent of purchases were related to the rebate. The final estimate is from a study of state-based incentives by Gallagher, Sims and Muehlegger which provides an estimate of five percent of sales related to the incentive.

Even in the best case scenario, two out of three people benefitting from the sales tax break would have purchased the car anyway.

Using these estimates, analysis shows that even in the best circumstances, the sales tax exemption costs $136.41 to reduce one ton of carbon. This is more than ten times the cost to reduce a ton of carbon compared to investing in projects that reduce carbon. Instead of reducing 10 tons of CO2, the state only reduces one.

The situation with the Tesla is even worse. It costs up to $4,000 to reduce one ton of carbon by waiving the sales tax on a Tesla. Instead of reducing 304 metric tons of CO2, the state only gets one ton of reduction.

Adding insult to injury, the policy taxes working families to give tax breaks to people who can afford a $90,000 car. These buyers are extremely price insensitive and it is unlikely that any of them would have decided not to buy the car without the sales tax break.

Ultimately, these tax breaks have nothing to do with saving the planet. They are political touchstones for politicians who want to appear they are doing something by associating with a cool, new technology.

Electric Car  
Nissan Leaf $28,800
Sales tax 9.80%
Savings (Includes new $100/yr electric car tax) $1,822
Average MPG Alternate (EPA) 27.3
Avg Miles per year (EPA) 11,489
Gallons per year 420.84
CO2 per year - lbs 8164.3
CO2 per year - MT 3.71
CO2 - 10 years 37.11
Cost per MT $49.11
Cash for Clunkers (36%) Cost per MT $136.41
Canadian hybrids (26%) Cost per MT $188.87
State Hybrid Tax Incentives (5%) Cost per MT $982.14
Tesla Model S $85,900
Sales tax 9.80%
Savings (Includes new $100/yr electric car tax) $7,418
Average MPG Alternate (EPA) 27.3
Avg Miles per year (EPA) 11,489
Gallons per year 420.84
CO2 per year - lbs 8164.3
CO2 per year - MT 3.71
CO2 - 10 years 37.11
Cost per MT $199.89
Cash for Clunkers (36%) Cost per MT $555.26
Canadian hybrids (26%) Cost per MT $768.82
State Hybrid Tax Incentives (5%) Cost per MT $3,997.88

Comments

Economic Benefits

It's not just about the environmental benefits. In Washington, we spend $18 billion per year importing oil. By not buying 4,000 gallons of gas, an electric vehicle keeps $16,000 in our state. Some of those dollars get spent on locally-produced electricity, and the rest can be spent on local goods and services.

Although the direct benefit of of the sales tax exemption is to lower the purchase cost of a new vehicle, it also lowers the resale value of used vehicles, which more quickly makes these new money-saving vehicles available to an even wider population.

Finally, the benefit of these vehicles extends beyond the driver. By getting more of these cars on the road, people are seeing that electric cars are a viable alternative to gas cars. By talking to their friends, neighbors and co-workers who drive electric, more people are finding out that electric cars are more fun to drive, cheaper to operate, and more convenient to fuel than gas cars.

Together, these effects speed our adoption of these cars and moves us toward breaking our state's dependence on imported oil.

Misses Point on Incentivizing new Technology for EV Cars

The sales tax break is not about current carbon savings. This analysis attempts to recover all tax saving costs against each current sale. This sales tax break is about moving a new technology mainstream to the point future sales tax breaks are no longer required to make the EV product market competitive with gas cars.

Assume the credit continues till there are some, whatever, number of EV cars on the road and the market is established, if carbon savings remains your sole metric (rather than say oil import energy independence), the sales tax exclusion benefit should be spread across the entire projected base of EV cars enabled by the forward thinking tax break.

I agree that for the Tesla that 2 of 3 would purchase the car anyway but disagree that would apply in the LEAF price range. So cap the benefit to the first $60K or so.

Frankly, the cost of this sales tax exclusion is trivial compared to the cost of other tax favored treatments, business especially, across the state. WA State climate and hydro power make it an excellent choice for EV deployment.

The EV sales tax exclusion should be renewed; its a small cost that has a reasonable chance to benefit the public and economy by fostering new industries and businesses focused on EV vehicles.

Of course, this won't get posted because the "message" must be controlled.

Anonymously Hoping It Will All Work Out, Someday

First, there is some irony to posting anonymously and then demanding, for the sake of transparency, that the comment must be posted. You want us to publicly publish your comments when you won't even publicly stand behind them.

Second, you say that "current carbon savings" aren't the goal of this tax credit. Fine, but then you must also admit that this policy wastes current opportunities in the hope that someday in the future your preferred strategy will pay off. This undermines the message that climate change is a "crisis" that must be addressed now. Either it is a crisis and we must be effective today or we have time to burn and can take some chances -- not both.

Finally, if you want to argue that we should focus on "oil import energy independence," then you should also support expansion of drilling in North Dakota, the Keystone Pipeline, etc. Those are more effective, and immediate, ways of reaching that goal.

Falling into the trap of confusing particular technologies, like electric cars or hydrogen energy or ethanol, with progress on reducing carbon emissions has been the single greatest source of waste of resources that could be helping the environment. It is why even as Washington state claims "leadership" on climate policy, our record on actual carbon reductions is poor.

Your estimate on Leaf is

Your estimate on Leaf is grossly inaccurate. I find your ignorence offensive.
Next time you write anything do research first, misleading people with facts you
Made up are inappropriate.

"Ignorence"

I would take this seriously if it included an argument...or data...or correct spelling.

Overstating LEAF sales tax

The vast majority of LEAFs are leased. The sales tax is up to 70% lower than if purchased depending on cap reduction payment (cash down payment in lease terms) and it is common for LEAF leases to have cap reductions that are zero to $500. In addition, leases are typically for 2 - 3 years. WA EV sales tax exemption does not apply to used cars.

See http://blogs.wsj.com/corporate-intelligence/2013/06/21/dont-get-stuck-in...
And see http://www.leasetips.com/salestax.htm

Glad to see you are in support of means testing tax exemptions based on wealth. It is about time! It should be done across the board don't you think? Clearly, the highly profitable oil refiners in our state do not need their B&O tax break either and would still produce oil without it.

Exemption is Meaningless?

The purpose of the sales tax exemption is to incentivize the purchase of electric cars. Your argument seems to be "don't worry, the sales tax exemption doesn't really apply to most Leafs and, therefore, has little (or no) impact on total sales."

Put simply you argue that people are buying or leasing Leafs independent of the existence of the tax break. Exactly!

Your argument makes my point -- the sales tax exemption doesn't effectively increase sales and, therefore, doesn't effectively reduce carbon emissions. Since most Leaf, and Tesla, owners would buy or lease the car anyway, the tax break is for nothing and produces no environmental benefit.

BTW, if you'd paid any attention to free-market advocates at all, you would know that we favor means testing. I have said many times "regulation favors the rich." That's why major corporations like GE advocate more government subsidies and regulation arm-in-arm with those on the left. It is why millionaire owners of biofuel companies go arm-in-arm with environmental groups to Olympia to push for a Low-carbon Fuel Standard.

If you are worried about government money going to rich people who have the lobbyists to advocate tax increases on working families, you should start with the environmental community who have advocated that strategy specifically.

Great news to hear that WPC supports HB 2465

Based on your comments above about support for means testing subsidies for wealthy corporations, I'm counting WPC as a supporter for HB 2465 which closes a $59 million dollar loophole benefiting oil refiners and directs it to education funding . Correct me if I'm wrong.

In your original post, substitute Tesla buyers for oil companies and EV sales tax exemption for the "extracted fuel use tax exemption" that benefits the oil refiners and you get according to the WPC: "Adding insult to injury, the policy taxes working families to give tax breaks to oil companies who can afford it. The oil companies are very profitable and it is unlikely that any of them would have decided not to refine oil without their extracted fuel use tax exemption." Right?

I Correct You. You Are Wrong.

How can I correct "you" when you are anonymous? Why not have the courage of your convictions?

I have repeatedly said we believe in a level playing field for all energy sources. HB 2465 doesn't level the playing field, it just singles out one energy source while protecting wasteful tax loopholes for other, preferred, sources. We support a technology-neutral approach where energy sources pay the price of their environmental impact.

Good to see, however, that you agree with my arguments on the Tesla when previously you disagreed. Whoever you are, I expect you will encourage an amendment to 2465 that repeals the millionaire tax break for electric cars.

If you are concerned about profitability, then you should support taxes on Apple, Microsoft and Google. They make quite a bit. That, however, is a good thing. They create jobs and won't be coming, hat in hand, to taxpayers for bailouts.

We should celebrate success, not envy.

Washington State is Leading the Charge

Arguing that the sales tax exemption hasn't increased sales doesn't hold up to scrutiny.

There are more Model S owners in Seattle than any other city outside California. In fact Washington has higher per-capita Model S sales than any other state.

Seattle is the #4 market for Leafs, behind San Francisco, Los Angeles, and Atlanta. Why is Atlanta beating Seattle? Because Georgia has a $5,000 state income tax credit for electric vehicles. (California has a $2,500 rebate.)

Washington's sales tax exemption is the best of the incentives. It doesn't require funding and it applies to anyone, even if they don't have enough income for a tax credit to pay off.

You Care About Nissan Leafs. I Care About The Environment.

This suffers from many fallacies.

First, correlation is not causation. You single out the factor you think is important and claim it is decisive while ignoring all other factors. This is an obvious, statistics 101, kind of error.

Second, those other factors are often decisive. One recent report on why Atlanta is #1 for the LEAF notes "Add in that California has tons plug-in choices that dilute LEAF sales there and you’ll begin to see why the LEAF couldn’t forever remain the best selling EV in all of those California cities. The competition in California is fierce. In Atlanta, not so much." So, there are no other options in Atlanta. What you are seeing is not a surge in purchases of electric cars but one type of electric car. How many Teslas are purchased in Atlanta?

Third, if the sales tax exemption is so critical, you should see high sales of Leafs in Spokane. If there are differences in the rate between Seattle and Spokane, then another factor is driving sales, not the tax exemption.

Fourth, you don't actually address whether the income tax credit is good for the environment. At $5,000, even if 50 percent of sales would not occur without the tax credit, the cost to reduce one metric ton of CO2 is $260. You have said previously that you don't care about carbon reductions, but for those who care about cutting emissions, raising the rebate to $5,000 only makes the environmental effectiveness worse.

1. You correctly point out

1. You correctly point out that correlation is not causation when I site numbers that support my position, but your arguments are supported only by opinion and conjecture.

Here's more data for you: a May 2013 survey of California EV owners found that the California rebate was an important motivating factor in the purchase decision for 95% of respondents.

http://energycenter.org/programs/clean-vehicle-rebate-project/vehicle-ow...

What data supports your position?

2. For 2013, the all-electric vehicles that are available everywhere (Leaf, Model S, iMiEV, Focus Electric) account for 43,044 out of 46,816 plug-in vehicle sales. That's 92%. The cars that are only in the ZEV states only account for 8% of plug-in sales. These other choices are not diluting Leaf sales in California, nor exaggerating Leaf sales in Georgia or Washington.

3. I didn't say the sales tax exemption was the only factor driving EV sales, just that it is a factor. Spokane gets a lot more snow than Seattle does and there are not yet any four-wheel drive EVs, so I would expect lower sales in Spokane. According to data from WSDOT, Spokane country is #7 in all-electric vehicle registrations, which seems pretty good considering the difference in EV suitability. (Although I must say that a two-wheel drive EV performs much better in the snow than a comparable gas car because of the fine control of torque, especially at low speeds.)

4. I did address the impact of the sales tax exemption, and other incentives, on the environment. You insist that the only benefit is the direct reduction in emissions, but I previously pointed out the benefits in increasing awareness and consumer acceptance, and the resulting network effect in speeding up adoption. There's a big multiplication factor at work: EV ownership spreads. At least ten friends have purchased EVs after learning of our positive experience. Most EV owners site cost savings as a top factor in their decision. Those people are doing the math and counting on that sales exemption.