Electric Cars Too Costly for the Many, Even with Tax Credit

Policymakers in Washington are promoting electric vehicles as a solution to climate change. But an uncomfortable truth remains: Battery-powered cars are much too expensive for a vast majority of Americans.

Congress has begun trying to address that problem. The climate and energy package passed on Sunday by the Senate, the Inflation Reduction Act, would give buyers of used electric cars a tax credit.

But automakers have complained that the credit would apply to only a narrow slice of vehicles, at least initially, largely because of domestic sourcing requirements. And experts say broader steps are needed to make electric cars more affordable and to get enough of them on the road to put a serious dent in greenhouse gas emissions.

High prices are caused by shortages of batteries, of raw materials like lithium and of components like semiconductors. Strong demand for electric vehicles from affluent buyers means that carmakers have little incentive to sell cheaper models. For low- and middle-income people who don’t have their own garages or driveways, another obstacle is the lack of enough public facilities to recharge.

The bottlenecks will take years to unclog. Carmakers and suppliers of batteries and chips must build and equip new factories. Commodity suppliers have to open new mines and build refineries. Charging companies are struggling to install stations fast enough. In the meantime, electric vehicles remain largely the province of the rich.

To some extent, the carmakers are following their usual game plan. They have always introduced new technology at a luxury price. With time, the features and gadgets make their way into cheaper cars.

But emission-free technology has an urgency that voice navigation or massaging seats did not. Transportation accounts for 27 percent of greenhouse gas emissions in the United States, according to the Environmental Protection Agency. Battery-powered cars produce far less carbon dioxide than vehicles that run on gasoline or diesel. That’s true even accounting for the emissions from generating electricity and from manufacturing batteries, according to numerous studies.

Only a few years ago analysts were predicting that electric vehicles would soon be as cheap to buy as gasoline cars. Given the savings on fuel and maintenance, going electric would be a no-brainer.

Instead, soaring prices of commodities like lithium, an essential ingredient in batteries, helped raise the average sticker price of an electric vehicle 14 percent last year to $66,000, $20,000 more than the average for all new cars, according to Kelley Blue Book.

Demand for electric vehicles is so strong that models like the Ford Mach-E are effectively sold out, and there are long waits for others. Tesla’s website informs buyers that they can’t expect delivery of a Model Y, with a purchase price of $66,000, until sometime between January and April.

A new proposal. The $370 billion climate, tax and health care package that Senate Democrats passed on Aug. 7 could have far-reaching effects on the environment and the economy. Here are some of the key provisions:

Auto industry. Currently, taxpayers can get up to $7,500 in tax credits for purchasing an electric vehicle, but there is a cap on how many cars from each manufacturer are eligible. The new bill would eliminate this cap and extend the tax credit until 2032; used cars would also qualify for a credit of up to $4,000.

Energy industry. The bill would provide billions of dollars in rebates for Americans who buy energy efficient and electric appliances. Companies would get tax credits for building new sources of emissions-free electricity. $60 billion is set aside to encourage clean energy manufacturing and penalties for methane emissions that exceed federal limits starting in 2024.

Health care. For the first time, Medicare would be allowed to negotiate with drugmakers on the price of some prescription medicines. The bill would also extend subsidies available under the Affordable Care Act, which were set to expire at the end of the year, for an additional three years.

Tax code. The bill would introduce a new 15 percent corporate minimum tax on the profits companies report to shareholders, applying to companies that report more than $1 billion in annual income but are able to use credits, deductions and other tax treatments to lower their effective tax rates. The legislation would bolster the I.R.S. with an investment of about $80 billion.

Low-income communities. The bill would invest over $60 billion to support low-income communities and communities of color that are disproportionately burdened by climate change. This includes grants for zero-emissions technology, as well as money to mitigate the negative effects of highways and other transportation facilities.

Fossil fuels industry. The bill would require the federal government to auction off more public space for oil drilling and expand tax credits for coal and gas-burning plants that rely on carbon capture technology. These provisions are among those that were added to gain the support of Senator Joe Manchin III, Democrat of West Virginia.

West Virginia. The bill would also bring big benefits to Mr. Manchin’s state, the nation’s second-largest producer of coal, making permanent a federal trust fund to support miners with black lung disease and offering new incentives to build wind and solar farms in areas where coal mines or coal plants have recently closed.

With so much demand, carmakers have little reason to target budget-minded buyers. Economy car stalwarts like Toyota and Honda are not yet selling significant numbers of all-electric models in the United States. Scarcity has been good for Ford, Mercedes-Benz and other carmakers that are selling fewer cars than before the pandemic but recording fat profits.

Automakers are “not giving any more discounts because demand is higher than the supply,” said Axel Schmidt, a senior managing director at Accenture who oversees the consulting firm’s automotive division. “The general trend currently is no one is interested in low prices.”

Advertised prices for electric vehicles tend to start around $40,000, not including a federal tax credit of $7,500. Good luck finding an electric car at that semi-affordable price.

Ford has stopped taking orders for Lightning electric pickups, with an advertised starting price of about $40,000, because it can’t make them fast enough. Hyundai advertises that its electric Ioniq 5 starts at about $40,000. But the cheapest models available from dealers in the New York area, based on a search of the company’s website, were around $49,000 before taxes.

Tesla’s Model 3, which the company began producing in 2017, was supposed to be an electric car for average folks, with a base price of $35,000. But Tesla has since raised the price for the cheapest version to $47,000.

Even used electric cars are scarce. Popular models like the Tesla Y and Ford Mach-E are sometimes selling for thousands of dollars more used than they did new. Buyers are willing to pay a premium to get an electric car, even a used one, right away.

Joshua Berliner, a Los Angeles entrepreneur, was in the market for a used Model 3 sedan but discovered that prices were higher than for a new Tesla. “The same held true for nearly every make we looked at,” Mr. Berliner said in an email.

Mr. Berliner, who owns a Tesla and wanted a second one for his wife, said he had become so desperate that he almost bought a gasoline car. “I normally wouldn’t consider combustion vehicles, but if gas prices were lower I might have pulled the trigger,” he said.

Tesla’s website says buyers of a Model Y, with a purchase price of $66,000, can’t expect delivery until next year.Credit…Roger Kisby for The New York Times

The Inflation Reduction Act, which appears likely to pass the House, would give buyers of used cars a tax credit of up to $4,000. The used-car market is twice the size of the new-car market and is where most people get their rides.

But the tax credit for used cars would apply only to those sold for $25,000 or less. Less than 20 percent of used electric vehicles fit that category, said Scott Case, chief executive of Recurrent, a research firm focused on the used-vehicle market.

The supply of secondhand vehicles will grow over time, Mr. Case said. He noted that the Model 3, which has sold more than any other electric car, became widely available only in 2018. New-car buyers typically keep their vehicles three or four years before trading them in.

A $7,500 credit for new electric vehicles, another provision of the Inflation Reduction Act, would help push down prices across the board and filter down to the used-car market, Mr. Case said. Carmakers sold nearly 200,000 new electric vehicles in the United States from April through June. As those new cars age, used electric vehicles will become “accessible to a lot more people,” Mr. Case said.

The problem is that many new electric cars may not qualify for the $7,500 credits. The Inflation Reduction Act sets standards for how much of a car’s battery must be made in North America with raw materials from trade allies. Several car manufacturers and suppliers have announced plans to build battery factories in the United States, but few have begun producing.

“Right now with our lack of capacity for materials, I don’t think there is any product that will meet that today,” Carla Bailo, president of the Center for Automotive Research in Ann Arbor, Mich., said of the standards. “Tesla is probably close, but the rest of the manufacturers, no way.”

The legislation also excludes imported electric vehicles from the tax credit. The provision is designed to protect American jobs but would undercut the price advantage of Chinese brands that are expected to enter the United States. SAIC’s MG unit sells an electric S.U.V. in Europe for about $31,000 before incentives.

New battery designs offer hope for cheaper electric cars but will take years to appear in lower-priced models. Predictably, next-generation batteries that charge faster and go farther are likely to appear first in luxury cars, like those from Porsche and Mercedes.

Companies working on these advanced technologies argue that they will ultimately reduce costs for everyone by packing more energy into smaller packages. A smaller battery saves weight and cuts the cost of cooling systems, brakes and other components because they can be designed for a lighter car.

“You can actually decrease everything else,” said Justin Mirro, chief executive of Kensington Capital Acquisition, which helped the battery maker QuantumScape go public and is preparing a stock market listing for the fledgling battery maker Amprius Technologies. “It just has this multiplier effect.”

This points to why the tax credits are paltry for buying EVs and it’s mainly the wealthy and upper middle class will be taking advantage of it. Most of the country will be running gasoline cars because there’s no incentives they are able to qualify for.

Most of the bill won’t help working class families. Hence my diatribe yesterday.

A Stock Buyback Tax Isn’t a Great Idea

As my colleague Bob Kuttner explains today, Sen. Kyrsten Sinema (D-AZ) shielded the private equity industry from the crippling burden of minor taxation in the Inflation Reduction Act. Kuttner is right that tax policy isn’t really a good way to deal with the scourge of private equity; repealing the exemptions to the Investment Company Act of 1940 and ending the use of investment fund leverage would do the job much more cleanly. Fortunately, the industry is getting weaker amid sell-offs, so there may be a better time to deal with private equity down the road.

As a replacement to taxing fund managers, Sinema deigned to approve a 1 percent excise tax on stock buybacks. This creates a non-trivial financial transaction tax at the federal level for the first time in the U.S. since the mid-1960s. (There’s a tiny financial transaction tax currently in operation that funds the Securities and Exchange Commission.) In theory, getting Wall Street and CEOs who profit from buybacks to pay some of the freight for investing in the energy economy is a nice win.

But this is another scenario where taxation is a miscast solution to the problem. Most researchers who have studied buybacks, which involve companies using earnings to buy back their own stock in a manner that increases the share price, believe they manipulate markets, stifle innovation, dampen corporate investment and worker wages, and serve mainly to enrich shareholders, particularly insider executives. If you think this should be verboten—as they were in the U.S. until 1982—I’m afraid that taxing buybacks will probably have the opposite effect.

A tax designed to discourage activity can work. Taxing cigarettes has led to lower consumption. But such Pigouvian taxes only succeed if they are high enough to change behavior. A 1 percent excise tax on buybacks doesn’t seem to meet that threshold. Indeed, business groups were largely untroubled by the change: The most they could muster was a sigh that it was “the least bad tax” under consideration. “I do not see the 1 percent tax inhibiting corporate buybacks,” S&P analyst Howard Silverblatt told The Wall Street Journal.

Democrats estimate that the buyback tax will raise $74 billion over ten years. “The reason it raises revenue is that it will not deter buybacks,” said Reuven Avi-Yonah, a law professor at the University of Michigan and a corporate tax expert. Indeed, if you work backwards from the 1 percent levy, you see that the revenue projection presumes $7.4 trillion in buybacks over the next decade. That’s roughly equivalent, adjusted for inflation, to the amount of buybacks over the last decade: From 2010 to 2019, there were around $6.3 trillion in share repurchases, according to a 2021 Roosevelt Institute report. (Buybacks have risen of late; $1 trillion are expected this year, and because this tax doesn’t go into effect until 2023, there will probably be more, as the tax change pulls activity forward.)

I don’t think budget scorekeepers have any special insight into whether the excise tax will discourage corporations from buybacks; they probably just derived their score from the previous decade’s level of activity. Lenore Palladino, assistant professor of economics and public policy at UMass Amherst and co-author of that Roosevelt Institute paper, told the Prospect that she was “curious what the actual effect will be,” but she acknowledged that, while “it’s great to raise $74 billion, you’re still propping up the stock market.”

Giving the government a financial incentive to enable share repurchases is a kind of kickback in itself, and one that’s hard to end.

The bigger problem is that the excise tax cuts the government in on the buyback scam. Not only will shareholders and executives continue to benefit over workers and capital investment, but so will the U.S. Treasury. Henceforth, if you try to limit buybacks—which the Biden administration proposed in its 2023 budget—that will cost the government money. If you try to ban them, which the SEC could do simply by removing the safe harbor put in place in 1982 that effectively decriminalized the practice, that would cost the government even more.

The peculiarities of legislative PAYGO rules would mean that any change to the treatment of buybacks now must make up for the lost tax revenue. And if the executive branch sets rules to stop buybacks on their own, Congress could opt to kill that rule, and use the revenue boost as a “pay-for” to offset spending.

We have an example of this in the Inflation Reduction Act, actually. In 2019, the Trump administration enacted a “rebate rule,” ending the safe harbor for pharmacy benefit managers to take rebates from drug companies without being subject to anti-kickback laws. (This, by the way, is directly analogous to the SEC potentially eliminating the safe harbor on buybacks.) The Congressional Budget Office claimed that removing this kickback to PBMs would somehow end all efforts to negotiate drug prices on behalf of Medicare and Medicaid entirely, and cost the government $187 billion.

This was a shortsighted estimate by CBO: PBM rebates raise list prices (because the higher the list price, the higher the rebate that they skim off the top) and harm patients. But regardless, reversing the rebate rule subsequently became a useful pay-for. In three separate major bills in the Biden era—the bipartisan infrastructure law, the bipartisan gun safety bill, and the Inflation Reduction Act—Congress either delayed or repealed the rebate rule to pay for its priorities. (Biden should probably enact the rebate rule again just to give Congress another $200 billion in free money to play with.)

That could easily happen with buybacks as well: If the government tried to regulate them out of existence, Congress would restore the status quo, and reap the financial windfall. Giving the government a financial incentive to enable share repurchases is a kind of kickback in itself, and one that’s hard to end.

Palladino and William Lazonick’s Roosevelt paper, which offered a number of ways to curb buybacks, did not include excise taxes, perhaps because of this dynamic. Lazonick, who is the nation’s leading critic buybacks, told the Prospect in an email, “The 1 percent tax on buybacks in effect says: ‘We will let financial interests who want to use corporate cash to manipulate stock prices so that they can realize personal income gains when they sell their shares continue to loot the corporations—provided that they give one penny of every dollar looted to the federal government.’”

Palladino offered a slightly more optimistic case. The SEC has proposed more detailed disclosure rules for buybacks, after previously admitting that it wasn’t monitoring the current weak limitations on how much stock corporations actually buy back. The Commerce Department, in guidance last week, said that in determining the recipients of the recently passed CHIPS Act, which offers subsidies to semiconductor manufacturers for domestic production, it would give preference to companies that do “not engage in stock buybacks.”

“Policymakers are recognizing that buybacks are a waste that move us away from innovation,” Palladino said. She added that giving buybacks their moment of attention might lead toward more change. But she agreed that the excise tax “is not a structural solution to the harms of stock buybacks … It’s not the right solution to deal with the problem of shareholder primacy.”

The other issue with taxing buybacks is that, even if it successfully discourages companies from repurchasing their own shares, they can still disgorge cash to shareholders through raising dividends. Indeed, though Intel’s new CEO Pat Gelsinger said publicly last May that his company would focus less on buying back stock, just last week Intel announced that it would increase its dividend in the coming year, and pay for it by reducing its buildout of semiconductor facilities by $4 billion—precisely the opposite of what U.S. policy has pushed for in the CHIPS Act.

A scenario where buybacks drop at the same rate that dividends rise does nothing to change corporate America’s preference to giving shareholders funding rather than investing in their core business. Tax policy is not well equipped to do that. Meanwhile, to the extent that the buyback excise tax actually helps cement buybacks as a feature of American corporate life, it’s unwise policy, even if it raises a little bit of federal green capital spending.

Winners & Losers in Tax Policy

In the last-minute negotiations to get 50 votes for the Inflation Reduction Act, the private equity industry made out like the bandits that they are. Sen. Sinema’s first successful demand was to get rid of a reform that would have required private equity earnings to be taxed as ordinary income rather than at the lower capital gains rate under current law. That cost about $14 billion, and it has gotten the most attention in the coverage of the bill.

To offset that revenue loss and other losses in the final bargain, Sens. Chuck Schumer and Joe Manchin agreed to another reform that would have increased other taxes levied on private equity—by subjecting most to a corporate minimum tax. But late Sunday, in the final bargaining, the industry persuaded Sinema to strip that from the bill as a condition of voting for it, leaving the private equity companies more powerful and more politically protected than before.

The big PE outfits own portfolios of hundreds of actual operating companies. Because they are not publicly traded on stock exchanges, both the PE firms and the companies they own are exempted from the usual disclosures and conflict-of-interest rules required by the Securities and Exchange Commission.

As the bill headed for final passage, it included a provision subjecting corporations to a 15 percent minimum tax based on their true “book” income as opposed to the income they report to the IRS via creative accounting. (This was weakened by the late insertion of a provision allowing corporations to keep the special accelerated depreciation deductions created by the Trump tax cuts of 2017.)

Until the eleventh-hour concessions to Sinema, written by the PE industry, private equity companies were to be treated as a single unit for tax purposes, and their income would be subject to the 15 percent minimum if it aggregated to more than $1 billion. But at Sinema’s behest, the final bill added a carve-out scrapping that provision.

Taxing was never a great remedy to address the abuses of private equity. The right remedy is to close the loopholes in the securities laws that allow private equity to exist at all, some of which is proposed in Sen. Elizabeth Warren’s Stop Wall Street Looting Act.

It is encouraging that all Senate Democrats except Sinema, many of whom receive campaign contributions from PE, were willing to vote for a measure that would have slightly cut PE’s after-tax profits. But deeper reform will require either repeal of the filibuster or more Senate Democrats for the next reconciliation bill in 2023, assuming Democrats can hold the House. That’s a steep climb. As it becomes even wealthier, PE grows more politically powerful.

As for the other tax measures in this year’s bill, one of the good provisions that has gotten too little attention is dramatically increased funding of $79.6 billion for the IRS over the next ten years (an increase of more than 50 percent over current levels), which the Congressional Budget Office projects will bring in an additional $203.7 billion in revenue, a figure that many tax experts consider too low. Unfortunately, under the terms of the deal, all new money goes to deficit reduction, not new spending.

Deeper reform will require either repeal of the filibuster or more Senate Democrats for the next reconciliation bill in 2023.

For decades, a key part of the Republican “starve the beast” strategy has been to vilify the IRS as a dangerous police agency and strip its resources. In the past decade alone, the IRS budget has been cut by about 15 percent, adjusted for inflation; its total workforce, at about 79,000 full-time employees, is about what it was in 1974, since which time the annual number of tax filings has nearly doubled.

In testimony before the Senate Finance Committee last April, IRS Commissioner Charles Rettig told the committee: “Over the next six years, we estimate we will need to hire 52,000 employees just to maintain our current levels.” Rettig also called attention to the agency’s woeful underinvestment in computer technology, adding, “Absent consistent, timely, multi-year funding we have largely been a paper-based organization operating in a digital environment. In 2022, IRS employees should not be transcribing paper returns by hand.”

And that understates the problem. As new loopholes keep being added to the tax code, the kinds of tax dodges used by corporations, partnerships, and individuals become ever more complex and are no match for an overwhelmed and underresourced IRS (witness the tax maneuvers of one Donald Trump).

The richer you are, the less likely you are to be audited. Total IRS audits in 2021 were just four per thousand (0.4 percent), a percentage that has been dropping for decades, but were five times that for low-income people. Given its rudimentary computer technology, a favorite IRS device has been to use computer matching to audit recipients of the Earned Income Tax Credit (who include no hedge fund managers) for technical violations.

Doing comprehensive forensic audits of a small number of corporations, banks, real estate ventures, and PE companies could literally consume the entire IRS enforcement division. And because a tax expert can make ten times as much helping rich people avoid taxes as helping the IRS to collect them, the revenue service has had great difficulty attracting and retaining career people with the technical skills to match those of the tax evaders.

Since all of these tax dodges are used almost exclusively by very rich people, there is no more progressive tax strategy than improving enforcement. The enhanced IRS budget is long overdue. And while we are at it, it’s high time to replace Rettig, a holdover Trump appointee who tells Democrats what they want to hear, with a progressive fully committed to the IRS mission.

CNN – 8/9/2022 – @BernieSanders interview asked why he voted for the Manchin / Schumer climate tax bill

"We had 2 corp. Dems who didn't want to stand up for working people…we need to elect 2,3 or 4 (Senate) Democrats in this midterm election" pic.twitter.com/RZTxuW3QF4

— CaseStudyQB – PeoplesGauntlet.com (@CaseStudyQB) August 10, 2022

Two things can be true:

1) Dems have made big gains in recent years among the college+, high social trust voters who tend to make up a larger share of low-turnout special electorates

2) I don’t think we would’ve seen these strong Dem performances in #NE01/#MN01 pre-Dobbs

— Dave Wasserman (@Redistrict) August 10, 2022

This much is clear from Kansas and the #NE01/#MN01 House specials: there's still time for things to snap back before November, but we're no longer living in a political environment as pro-GOP as November 2021.

— Dave Wasserman (@Redistrict) August 10, 2022

The point being made is that while the Dems lost the special elections, they fared better than expected and there’s a chance they could eek out a win in November in those districts. Not likely, but possible.

Death Valley, the hottest and driest place in the US just saw the 4th 1-in-1,000 year rain event in less than 2 weeks in the US.

3/4 of Death Valley’s annual rainfall fell in 3 hours. pic.twitter.com/0DK6HNNZTq

— Colin McCarthy (@US_Stormwatch) August 9, 2022

fixed the tweet for you, @Slate https://t.co/zpss4p7m3J pic.twitter.com/ecSlLz5avs

— David Sirota (@davidsirota) August 10, 2022

Conservatives were ok with the FBI when it came to the Panthers, MLK, and Malcolm X, now they have a problem with it.

If you have a problem with me pointing that out, you’re doing the bidding of these conservatives, which Jimmy is.

— Nina Turner (@ninaturner) August 10, 2022

Lock her up! Lock her up! Lock her…WAIT! https://t.co/dc4nZHD0HD

— StevenB (@stevenbblue) August 10, 2022

heh heh

24 days of peaceful picketing outside 874 Commonwealth Avenue and the City of Boston deems it appropriate to bring a prisoner transport vehicle to the picket line — what kind of message is this suppose to send to workers? pic.twitter.com/oRyKFDd3ea

— Boston Starbucks Workers United (@BostonSBWU) August 10, 2022

Rand Paul suggests Merrick Garland should be impeached for approving the Mar-a-Lago search warrant and that Republicans might do it if they retake control of Congress in January pic.twitter.com/EykeXhNYV8

— Aaron Rupar (@atrupar) August 10, 2022

What an idiot.

In order to bring about a genuine left internationalism, we need an independent foreign policy that's distinct from the objectives of corporate interests and the US security state. https://t.co/lONgBYgBe5

— Jacobin (@jacobin) August 10, 2022