With the Congressional lame duck session soon to begin, it is expected lawmakers will act on a number of tax provisions before the end of the year.
Congress may pass parts of the Tax Reform 2.0 legislation including the provisions that strengthen retirement, education, and family savings. It is also possible that lawmakers may pass technical fixes to the Tax Cuts and Jobs Act including allowing qualified retail improvement property to benefit from immediate, 100 percent expensing.
One proposal lawmakers should reject is legislation to extend and lift the cap on the Electric Vehicle Tax Credit as has been proposed in S. 3582/H. R. 7065, legislation introduced by Congressman Diane Black (R-TN) and Senator Dean Heller (R-NV).
Under current law, the federal EV tax credit grants a taxpayer purchasing a qualifying vehicle a credit of between $2,500 and $7,500 depending on the vehicle sold. The credit is capped at 200,000 vehicles per manufacturer at which point it begins to phase out.
This tax credit should not be extended, nor should the cap be lifted. Instead, the EV credit should be repealed or phased out as part of revenue-neutral tax reform.
The EV tax credit is bad policy. Ideal tax policy promotes the most economically efficient decisions by limiting the number of distortionary provisions. The EV tax credit undermines this goal as it arbitrarily benefits one type of car over others.
The credit is also regressive – almost 80 percent of the benefits go to those making $100,000 or more per year. This type of tax subsidy is also unpopular with the American people — 67 percent of voters oppose subsidizing electric vehicles.
The EV credit was originally created with the 200,000 vehicle cap as it was designed to help an emerging industry. Extending the credit and lifting the cap would enshrine a handout for electric vehicle manufacturers in the tax code.
Extending the EV credit also undermines the progress made by Republicans in making the tax code simpler and fairer. Over the past several years, GOP lawmakers have been successful in reducing the number of distortionary credits and deduction in favor of broader lower tax rates:
- In 2015, Congress passed tax extender legislation that made many conservative tax provisions permanent like small-business expensing, research and development credits, and provisions to prevent double taxation on international income. Importantly, many other, distortionary credits were phased out.
- Lawmakers built on this success by passing the Tax Cuts and Jobs Act in 2017. This legislation reduced tax rates for small businesses and corporations across the board, while again repealing numerous distortionary or preferential credits and deductions.
- Since passage of TCJA, Ways and Means Chairman Kevin Brady (R-Texas) has spent the year examining the merits of the remaining temporary tax provisions with a goal of either repealing or making permanent any remaining tax extenders.
Lawmakers have made admirably progress in recent years toward making the tax code simpler and fairer. Pushing policies like an extension and expansion of the regressive Electric Vehicle Tax Credit directly undermines this progress.