White House proposes Alternative Fuel Tax Credit increase to $10,000

The budget proposal from the President includes a provision expanding the plug-in tax credit to several alternative fuel vehicles and raising it from $7,500 to $10,000 at a cost of over $2.6 billion (at current sales rates) annually.

The White House introduced its proposed budget for the 2013 fiscal year last week. In that budget is a proposal to increase the tax credit for plug-in electric vehicles to $10,000 and to include several other alternative fuel powertrains in the mix. In addition, the credit would no longer be taken by the car's purchaser, but by the seller or financier instead.

This marks several shifts for the credit. First, it is now available to several alternative powertrains, defined as any that run "primarily on an alternative to petroleum." They would also have to meet a miles per gallon equivalent (MPGe) target and there would be no limit to the number of credits any one manufacturer could take, unlike current credits which max out at 200,000 per automaker.

Gene Sperling, director of the National Economic Council and assistant to the president for economic policy, says the credits are "technology neutral. We don't pick between natural gas and electric vehicles. We'll let the market determine that and give consumers the incentive to buy those cars."

Sounds good. Right? The devil's in the details.

First, the credits are not as simple as they appear. The $10,000 credit applies until 2016, at which point it drops to $7,500 for 2017, $5,000 in 2018, $2,500 in 2019 and then phases out in 2020. It also caps the credit at the current $7,500 for vehicles whose MSRP is above $45,000. It also has several credit tiers for heavy vehicles, allowing up to $40,000 in credits for commercial trucks and other on-road alternative-fueled vehicles.

Now consider costs. Ignoring the heavy vehicle market and credits, let's focus on automotive only, though potentially, the heavy market would add billions more to these totals.

In 2011, approximately 263,173 alternative fuel vehicles were sold (using numbers reported by manufacturers and compiled by Auto Blog Green, and admitting that most of those vehicles would not qualify). This would mean that if those numbers didn't change, the credits in 2013 would amount to $2.63 billion. Per year. Assuming no sales increases in alternatives, that would mean a total of almost $8 billion by 2016. Almost $2 billion more in 2017, $1.3 billion in 2018, and $658 million in 2019. That's a total cost of $12 billion in 6 years and this assumes no increase in alt-vehicle sales for that time period. What we're assuming here, which may be a big assumption on my part, is that most manufacturers will see the credit as incentive to move to plug-in (PHEV) powertrains for their current hybrids. The overwhelming majority of the alt-fuel auto sales in the U.S. are Toyota Prii, which will have a plug-in hybrid option very soon.

Next, the credit is given to the companies that finance or sell the car, not to the consumer. Those companies may or may not pass the money down to the consumer. Most probably will, obviously, but if you'll recall the early days of the Volt, price sniping was rampant. Were this money to go purely to the automakers, then we'd see a scenario similar to the ethanol industry in this country wherein producers work both ends of the stick to create a winning financial solution out of a no-win game, since corn ethanol cannot be justified at any level (energy production vs. use, cost vs. benefit, or profit margins) without government incentives.

The push to adopt greener technologies in automotive is a good one, but any objective look at government-backed programs, including this more laudable attempt by the current administration, is going to show potential blowback. It could very easily be argued that this is just a case of the government attempting to solve a problem that it itself is to blame for. Were the incentives and tax breaks not there for petroleum-based technologies, they would likely be more costly on several levels (from auto manufacturing down to the fuels themselves) than they are now, making alternatives a more appealing option for many.

As it is, the solution is apparently to just pile more incentives and tax breaks onto more incentives and tax breaks. That doesn't really make sense. If the administration's plan is really to "let the market determine" things, then wouldn't removing all market manipulation by government and leveling the playing field be a better solution?