This post, part of a series we're running all about electric cars, was written by Mark Boyer from HowStuffWorks.com.
The basic argument in favor of tax incentives for electric cars is that developing new battery technology is very expensive, but applying federal funds will help defray those EV start-up costs and help car companies to increase production. Once the electric car industry is scaled up to a certain degree, the cars will become more affordable to produce and to purchase.
To accomplish this, the U.S. is offering a $7,500 federal tax credit toward the purchase of zero-emissions cars (as well as smaller tax breaks on low-emissions vehicles) and up to 50 percent of the cost of a home car charger installation. The incentives can amount to about a 22-percent discount on the Nissan Leaf and more than $1,000 on the car charger. Local and state governments offer even more incentives. Buyer incentives aren't the only way taxpayers are supporting the development of electric cars; a bill introduced in Congress earlier this year proposes offering grants of up to $800 million toward the construction of public charging stations. "Tax incentives are an effective tool that helps make the upfront price equation for the consumer more attractive and can help spur early adoption of new technology," says GM spokesman Greg Martin.
The combination of those incentives amounts to a pretty good chunk of change, but will it actually help jump-start the electric car industry? Free-market economists argue that all government tax incentives are harmful because they create false demand and hinder competition. Others charge that buyer incentives on electric cars amount to regressive tax subsidies because they effectively take taxpayer money to help buy fancy toys for the rich (or the well-off, at least).
On the other side of the coin, it's widely believed that the federal government isn't doing enough to encourage increased production and buying of electric vehicles. Lithium-ion battery packs are very expensive to develop (the battery pack for a single car can cost as much as $10,000), and the technology is still emerging. Proponents of federal incentives argue that the most effective way to attract more buyers would be to raise the price of gasoline, as European governments already have done. Not only would an artificially increased gas price help stimulate sales of electric cars, it would also discourage drivers from using gasoline-powered cars more than necessary.
Another thing tax breaks do is give car companies an added incentive to get zero-emissions vehicles on the market, because the government will start phasing them out once 250,000 ZEVs are sold in the U.S. Knowing that tax money will only be available for a limited time, car companies will be encouraged to rush new electric models to showrooms. Right now, the only electric car that qualifies for the full $7,500 tax incentive is the Tesla Roadster, an electric sports car that starts at more than $100,000. Until more affordable models, like the Chevrolet Volt and Nissan LEAF, hit the market next year, there will be no way to tell if the incentives are actually working.