On EV Tax Credits, What’s Proponents’ Real Objective?

By Scott Lincicome and Ilana Blumsack of Cato. 

"Nestled in the ginormous, multi‐​trillion‐​dollar “Build Back Better” package that just passed the House is a bonus for not just buying American, but buying union. In particular, congressional Democrats and the White House have proposed that electric vehicle consumers receive a $12,500 refundable tax credit if they purchase an EV made at an American factory employing unionized workers. The subsidy declines, however, to $8000 if the vehicle is made at a non‐​union U.S. plant and it drops another $500 if the car’s battery isn’t American‐​made. Starting in 2027, moreover, only cars assembled in the United States would qualify for the base $7,500 credit.

The EV tax credit might make for good politics for the union‐​friendly Democrats pushing it, but the subsidy defies both economic reality and the United States’ international trade obligations, thus potentially undermining the very environmental objectives it is (supposedly) intended to achieve.

As our Cato colleagues and others have repeatedly explained, EV subsidies in general are unnecessary and regressive, while potentially raising other concerns (including environmental ones). Assuming that the government will provide some form of EV consumer subsidy, however, the BBB tax credit is the wrong way to do it.

First, non‐​unionized vehicle assembly plants in the United States appear to be more productive, innovative, and often even better‐​paying than their unionized counterparts. According to our calculations of Marklines data, roughly 50 percent of the vehicles produced domestically in 2019 were manufactured at non‐​unionized plants, even as unionized plants have a higher share of total U.S. automotive factory employment. (More output with fewer workers generally translates to higher productivity.) Production at non‐​unionized plants is also more efficient, with average annual capacity utilization levels higher than those of unionized Ford and GM plants:

Unionized automakers also have been slower to invest and innovate in the electric vehicle space than many of their non‐​unionized rivals. In terms of innovation, for example, Toyota and Honda, which have non‐​unionized plants in the United States, are ranked first and second in patent applications for EV technology. On the production side, non‐​unionized Volkswagen, Daimler‐​Mercedes‐​Benz, and Tesla have invested billions more in electric vehicles over the next half decade than Ford, GM, or Stellantis (formerly Chrysler), and they are today producing and selling far more EVs than the “Big 3.” In fact, the Wall Street Journal reports that only two EV models would currently qualify for the full tax credit, both iterations of GM’s Chevy Bolt, despite there being more than 50 electric vehicle models currently on the market (and despite the Bolt’s troubling recent history).

By encouraging the expansion of less productive and innovative unionized EV plants in the United States (and in turn discouraging the more productive/​innovative factories and their vehicles), the proposed tax credit could stifle domestic EV production and proliferation.

Even claims that these subsidies would promote “good paying jobs” are misguided. While non‐​unionized auto workers can earn less than “legacy” (pre‐​2008) UAW employees, the wages and benefits for newer workers at both types of facilities are comparable – a more apt comparison, given the extreme disruptions that EVs are expected to inflict on the U.S. automotive labor market. Indeed, of the 450 job openings at GM’s Flint assembly plant in June, 2021, 400 were lower‐​paying temporary positions, and compensation for similar work at non‐​unionized plants may actually be a bit higher. For example, Toyota has set wages at its Georgetown, KY plant starting at $21 an hour, in Huntsville, AL at $17 an hour, Troy, MO at $20 an hour, and Jackson, TN at $19 an hour. Temporary assembly line pay at Tesla’s Fremont factory appears to start at $21 an hour. By contrast, it appears that all wages for a temp GM assembler position start at $16.67 an hour, whether located in Flint, MI or Spring Hill, TN. All positions appear to offer benefits such as paid time off and health insurance.

Second, by limiting the full tax credit to domestic EVs/​batteries, the proposal is blatant protectionism in violation of the United States’ World Trade Organization (WTO) commitments. Thus, even if the “union bonus” is removed by the Senate (as seems likely, given Senator Joe Manchin’s opposition), the subsidy’s “buy American” preference still raises significant economic and legal concerns.

Our former colleague Simon Lester succinctly summarized these issues earlier this year:

Subsidies that are contingent on purchasing domestic goods have basically the same impact that tariffs do. They are an inefficient intervention in the economy which limits competition, can violate international trade rules, and invite similar actions or retaliation from trading partners. (Two economic studies of these measures are here and here.) The inefficiency plays out a little differently, because with these “domestic content subsidies,” the funding for the inefficiency comes through general tax revenue which then gets redirected to specific industries, rather than more directly through the tariff revenue collected from importers. But the result is the same….

As shown in Figure 2 below, half of the twelve best‐​selling EVs so far in 2021 were made abroad, and (as already noted) only the Bolt is union‐​made. It makes little economic sense to actively discriminate against most of the vehicles that American consumers most want.

Then there are the trade law problems, which Lester also explains:

[R]egulatory measures are not very transparent, and foreign producers have to scour every federal, state, and local statute and regulation to see if some protectionist measure has been slipped in. As a result, WTO rules are very strict in this area. To get technical about it, under WTO rules, Article III of the GATT, Article 3.1(b) of the Subsidies Agreement, and the Annex of the TRIMs Agreement all pretty clearly prohibit measures contingent on the use of local content….

WTO Members found to have implemented prohibited local content subsidies must remove them quickly or face retaliation (usually tariffs on imports from the offending nation). National “countervailing duty” laws, moreover, allow nations to unilaterally impose duties on imports found to have benefited from local content subsidies. (For more on global anti‐​subsidy disciplines and their economic implications, see Lincicome’s 2012 paper.)

Prohibited subsidies are frequently targeted by WTO Members (including, ironically, the United States) in WTO disputes or national CVD cases, and the proposed EV tax credit has already been the subject of complaints from countries – such as Japan, Canada, Mexico, South Korea, and the European Union whose auto companies export to the United States or have, as a general rule, non‐​union auto plants here. Trading partners have also complained about the BBB’s other local content subsidies (e.g., production and investment tax credits) too. Trade actions against the United States seem likely. Thus, the proposed EV tax credit would not only discourage imports of EVs that American consumers desire, but could also result in retaliatory foreign actions (tariffs, for example) against U.S. EV exports, thus harming domestic producers – union or non‐​union – and undermining national EV production.

For a policy supposedly intended to encourage the proliferation of innovative, environmentally‐​friendly technology, this tax credit sure seems to do a lousy job. It’s enough to make you wonder whether that’s the subsidy’s real objective.

For a better way to encourage the proliferation of environmentally‐​friendly technologies, see this recent paper from Cato’s James Bacchus and Inu Manak."