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

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.