President Trump’s Fiscal Year 2021 budget proposal calls for repeal of the Electric Vehicle Tax Credit.

This is the right policy. The EV credit is regressive, wasteful, and distortionary tax policy that arbitrarily benefits one type of car over others.

The tax code should promote economically efficient decisions by limiting the number of distortionary provisions. The electric vehicle tax credit directly undermines this goal and should be repealed as part of revenue neutral or revenue reducing tax reform.

Under current law, the 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 credit is highly regressive with a majority of the benefits of this credit go to residents of wealthy, blue states. Almost 80 percent of the credit goes to those making $100,000 or more per year. 

Further, according to 2019 projections of electric vehicle sales in the United States, California will account for over 61 percent of all EV sales in the nation. California’s clear domination of EV market share occurs despite the fact that California only accounts for roughly 12% of all licensed U.S. drivers.

Unsurprisingly, this type of tax subsidy is unpopular with the American people with 67 percent of voters oppose subsidizing electric vehicles.

The credit is also rife with waste and fraud. A recent report by the Treasury Inspector General for Tax Administration (TIGTA) found “the IRS does not have effective processes to identify and prevent erroneous claims.” Between 2014 and 2018, roughly 16,500 taxpayers received $73.8 million in potentially erroneous EV tax credits. A previous 2011 report found that as many as one in five EV credits claimed went to individuals who did not qualify for the credit.

Senators Ron Johnson (R-Wis.), Chuck Grassley (R-Iowa), and John Barrasso (R-Wyo.) led a letter last month urging for more information on these fraudulent claims.

Congress should follow the lead of the President repealing the EV credit as part of revenue-neutral tax reform.