Debt Ceiling Fiasco Continues Costly EV Tax Credits
The debt ceiling fiasco is over, and with it, the costly Inflation Reduction Act, or as I like to call it, the Inflation Recession Act, was unfortunately left mostly intact. Congress’s lackluster attempt to curb spending will matter even less considering this, as new calculations show. The time is ripe for a reassessment and elimination of at least the ill-advised tax credits contained within the IRA before irreversible damage is inflicted on our already suffering economy.
Last year, the Congressional Budget Office (CBO) estimated that the IRA would cost $391 billion from 2022 to 2031. But with updated data and Treasury rules, new cost estimates show it to be three times higher at $1.2 trillion.
During my recent testimony before the U.S. House Ways and Means Committee, I noted the need for a re-estimate of the IRA’s cost for tax credits that subsidize manufactured battery cells and modules for electric vehicles (EV). The CBO’s estimate of these tax credits was $30.6 billion, but new calculations have it at nearly $200 billion–or nearly seven times higher.
Battery cells can receive a $35 tax credit for every kWh of energy the battery produces, while battery modules can receive $10 per kWh, or “$45 for a battery module that does not use battery cells.”
The CBO’s assessment was conducted prior to the Treasury’s release of draft guidance in March that relaxes mineral sourcing standards to produce EV batteries. And since the IRA passed, there’s more evidence that incentives matter as EV manufacturers substantially increase production to get the tax credits well above CBO’s estimates.
Look no further than Tesla for a real-time example of how these tax credits will cost us.
Maker of the most-sold EVs in America, Tesla moved its battery production from Germany to Texas after the tax credits were announced. And its Model Y emerged as the best-selling EV in the U.S. last year, with a total of 234,834 units sold. Its battery starts at 75-kWh, so for those sales, Tesla could have received more than $616 million in tax credits had the tax credits been in place. For 2023, Tesla expects to manufacture 2 million EVs, resulting in possibly $5 billion in annual tax credits for batteries.
Meanwhile, Ford, which had the second-highest EV sales last year, plans to triple production for its F-150 Lightning, targeting 150,000 units by the end of 2023. The battery size for this model starts at 98-kWh, and assuming Ford meets its goal, that would cost taxpayers $514 million in tax credits.
If Tesla and Ford can collectively receive at least $1 billion in tax credits in 2023, it’s easy to see how the CBO’s estimate over the next decade for all EV batteries is too low.
This difference between the estimates and the growth of the EV market is concerning in this post-pandemic economy, verging on a recession where more than 60% of Americans are estimated to be living paycheck to paycheck. More government spending, like what’s allotted in the IRA, and more debt, like what’s allowed under the debt ceiling deal, is the last thing America needs.
As government spending increases, so do taxes, leading to less work, lower productivity and growth, and, subsequently, less tax revenue. These measures contribute to even higher budget deficits that stifle economic growth, increase poverty, and exacerbate multi-decade high inflation.
While the IRA’s green energy initiatives, massive tax hikes, and excessive spending should have been enough reason to reject it initially, Democrats forced it through based on CBO’s massive underestimates of tax credits and other initiatives.
Now, taxpayers will suffer the aftermath of this expensive legislation, which is why these costs should be reevaluated and ultimately eliminated before this weak economy is made worse for struggling Americans.
For a better path forward, we need more pro-growth policies and less government spending, not bad debt deals and corporate welfare to large businesses on the backs of taxpayers.
Vance Ginn, Ph.D., is founder and president of Ginn Economic Consulting, LLC, senior fellow at Americans for Tax Reform, and chief economist or senior fellow at multiple think tanks across the country. He previously served as the associate director for economic policy of the White House’s Office of Management and Budget, 2019-20. Follow him on Twitter @VanceGinn.