Thursday, August 18, 2022

A clarification: The "super-rich" probably won't be the ones benefiting from the EV tax credit in the IRA.

by Rod Williams, August 17, 2022- Recently I posted a piece titled, The Democrats’ Unserious Climate-Change Deal. I excerpted portions of an article by Kevin Williamson that appeared in National Review. This article addressed the environmental policy portion of the so-called Inflation Reduction Act. One of the article excerpts I posted was this:

Its environmental program is mainly one of subsidies for politically connected business interests engaged in the so-called green-energy trade and handouts to upper-middle-class urban progressives who enjoy getting a $7,500 tax benefit when they buy a new Mercedes.

In my own comment in that post, I called the $7,500 tax credit for purchasing an electric vehicle "a subsidy for the rich." Calling it a subsidy for the "upper-middle-class" may be correct but a subsidy for the "super-rich' probably is not. 

On the one hand, the bills takes away some tax credits that only benefited the super-rich. The bill does away with today’s tax credits for super pricy electric vehicles such as the Hummer EV, Lucid Air, and Tesla Model S and Model X. There are also new caps on how much vehicles can cost. For SUVs, pickup trucks, and vans, the cap is $80,000. For most other vehicles, the vehicle can not cost more than $55,000. So, while the "upper-middle class" may benefit more, the "super-rich" will probably benefit less.

The IRA also provides a credit of up to $4,000 on used electric cars so some middle-income people may benefit also, not just the "upper-middle-income." 

Another provision of the environmental portion of the IRA eliminates the tax credits for vehicles not assembled in North America, including the BMW i4, Hyundai Ioniq 5, Kia EV6, and Toyota bZ4X. (1). These tend to be the more affordable EV's, so this provision makes the subsidy unavailable for people who can only afford a lower-priced electric vehicle. 

This provision above sounds like a policy Donald Trump would love.  It sounds very "America First." or at least "North America First."  While I do not want us to be dependent on our adversaries for critical goods and while I recognize there have been some supply line issues, I still believe in free trade and do not want to see the dismantling of the established world order of commerce, and the role of international agencies such as the World Trade Organization.  I accept the law of comparative advantage and think trade makes a better quality of life for most people of the world, for a more interconnected peaceful world, and is the means to lift people in undeveloped countries out of poverty.  

I do not support policies that give an unfair advantage to consumer goods being made in America, including cars. That reduces consumer choice and increases costs to consumers and contributes to inflation. While designed to protect American jobs, it can actually cost American jobs.  The provision requring that only North-American-made cars are eligible for the tax credit has the effect of subsidizing North-American production of cars. A subsidy for American-made products is equivalent to a tariff on imports. Other countries will be less inclined to lower their tariff on American imports if we subside the American production of the same things they export to America.  I am becoming more and more of a minority in my view of trade, however, and it seems both parties have embraced protectionism and advocate some sort of industrial policy.

The bill's provision on the source of battery material however is wise in my view.  China's Belt and Road initiative is getting a stranglehold on critical materials around the world. "Starting in 2024, if any minerals or components are sourced from “foreign entities of concern,” including China or Russia, the vehicle will not qualify for any tax credit. An analysis this year of the EV supply chain from the International Energy Agency shows that the vast majority of minerals, components, and battery cells are currently sourced from China.(2)" 

Limiting the tax credit to a fewer number of cars, which will be more expensive because they are produced in America may make the tax credit less of a boon to car purchasers. A credit on a more expensive car may not be that much of a bargain. The bill also only includes enough funding for about 11,000 EV's in the first year. That is fairly insignificant.  

There are some elements of the climate policy included in the IRA of which I approve, such as restrictions on methane gas emissions and subsidies for cleaning up methane leeks. I am very pleased to see that nuclear energy is finally being treated as a carbon-free energy source as worthy of subsidy as wind and solar.  There seems to be a slow realization that environmental policy to address climate change must be more than feel-good measures. There seems to be an element of rationality seeping into climate change policy. 

So, while the Inflation Reduction Act probably won't do much to reduce inflation, and while I don't like the hiring of an additional 87,000 IRA agents, the IRA is not all bad. I am not sure it will live up to the hype of being a game-changer in America's response to climate change but some elements of the climate change policy make sense. My view is that the IRA will not do much good or much harm and there is both good and harm in the bill. Also, the beneficiary of the tax credit to purchase an electric vehicle will most likely benefit the upper middle class, not the super wealthy. 

For those who are going to take a principled position that the government should not use tax policy as a vehicle for social engineering, that train has already left the station.  We use tax policy to encourage different desired outcomes at different times and promote every sort of desired outcome from marriage to having children to homeownership to education to job training to good health. I think we should do less social engineering via tax policy than we do, but this use of tax policy as a vehicle for social change is nothing new. 

For more on the issue of the environmental component of the IRA, I  suggest reading, The climate bill will make cleaner energy cheaper for everyone, from The New York Times. For specific information on the vehicle tax credit see a piece that appeared in Consumer Reports and reposted in Yahoo News, Which EVs Qualify for the New Electric Vehicle Tax Credit? It’s Complicated.

In this post and in many articles and in everyday conversation people speak of the "middle-class," the "rich," and the "super-rich."  The U.S. government doesn't have an official definition of middle-class income. The Pew Research Center considers a household to have "middle-income" if it's between 67% and 200% of the median household income. The below chart is the closest thing to an official classification of income groups. However, "middle-income" in Lower Alabama is different than middle-income in Los Angeles. There are sources that list a middle-income for each state if you look for it. 

It should also be pointed out that some people may be rich but also low-income. Not many for sure, but wealth and income are not the same thing. People may have lots of accumulated wealth and live off of that wealth. The accumulated wealth may also be growing in value as the asset appreciates but produces little current income. The income it does produce may be tax sheltered so it is not reported as income. 

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