The U.S. public prefers electric vehicle tax credits be open to cars manufactured anywhere.
The new U.S. House of Representatives will probably revisit this year some critical pieces of legislation adopted last year. One issue the U.S. Congress should reexamine is the domestic sourcing requirements and other limitations on electric vehicle (EV) tax credits under the Inflation Reduction Act (IRA).
We suggest that these limitations on the incentives in the IRA reflect neither U.S. public opinion nor global political logic. They have become a major point of friction between the United States and its allies in Europe and Asia. When President Emmanuel Macron visited the United States last month, for example, he raised this issue with President Joseph R. Biden.
Our research suggests that U.S. public support for EV subsidies does not depend on either economic nationalism or equity concerns. Instead, the U.S. public favors faster uptake of technologies by making the EV tax credit available to all.
Admittedly, the IRA did make some important steps forward for climate policy. It generously funds several climate initiatives, including by providing a $7,500 tax credit for EV purchases. It also corrects a major problem with the existing system of EV tax credits by lifting the manufacturer-level cap, which restricted credits after manufacturers sold more than 200,000 vehicles in North America. For reference, Tesla sold about 360,000 vehicles in 2021 alone.
Sales numbers for EVs are only likely to increase. California, Washington, and New York have enacted laws requiring that new cars sold in these states be EVs or plug-in hybrids by 2035—and several other states are likely to follow their lead. In the face of these state mandates, the preexisting cap of 200,000 would have severely limited the availability of EV tax credits, thereby impeding the decarbonization of the transportation sector. In California alone, about 1.8 million new cars were sold in 2021.
Although the IRA laudably lifted restrictive sales limits, it has made EV credits more limited in other ways. In response to concerns that EV credits benefit the rich, for example, the IRA now restricts these credits to households making less than $300,000 and to single-filing taxpayers who make less than $150,000. The credits are also limited to cars that cost less than $55,000 as well as SUVs, vans, or trucks below $80,000.
Moreover, given China’s dominance of the EV supply chain, and the insistence of U.S. Senator Joe Manchin (D-W. Va.) that the U.S. protect its own manufacturers, the IRA restricts tax credits to U.S.-assembled cars whose battery’s critical minerals are extracted, processed, or recycled domestically or by countries with fair-trade agreements, such as Chile and Australia. By 2023, manufacturers must source 40 percent of a vehicle battery’s critical minerals domestically or under fair-trade agreements, and, by 2026, they must source 80 percent.
The scheme has drawn angry responses from U.S. allies in Asia and Europe that see the United States as discriminating against foreign-made vehicles and breaching World Trade Organization rules. IRA supporters, however, suggest that the tax credits reflect equity concerns and will help U.S. automakers regain global competitiveness and create homegrown jobs.
In recent months, several carmakers have attempted to find a way around the IRA’s stipulation about onshoring the EV supply chain. In the House of Representatives, lawmakers introduced the Affordable Electric Vehicles for America Act, which would make a tax credit available to essentially all EVs. However, what seems to be missing in the IRA debate is the views of U.S. consumers about who should be eligible for EV tax credits.
In a recent article, we argue that the U.S. public does not support restrictions on who should be eligible for EV credits. Using an original survey-based experiment, we found that limiting eligibility for incentives to U.S. automakers or vehicles made within the United States had no effect on support for the policy. This result held even when we primed respondents with an economic nationalism frame, such as an argument that EV incentives would otherwise benefit foreign companies over domestic companies.
We also found that respondents prefer EV incentives to be universal. Respondents do not support income-based or car price-based restrictions. In this respect, the IRA might be at odds with public opinion about general policy design that favors certain kinds of redistribution.
We simultaneously ran the survey in Japan where subsidies for domestic firms are an established feature of industrial policy, and we found the same type of support for the universalist tax credit policy.
The invasion of Ukraine and production cuts by the Organization of the Petroleum Exporting Countries (OPEC) are focusing policy attention on energy security. Although some argue for policy measures to enhance domestic oil and gas production, others emphasize achieving energy security by reducing demand for fossil fuels and not by increasing the supply. Demand reductions depend, in part, on how quickly the transportation sector moves from internal combustion engine-based vehicles to EVs. Thus, in addition to running in tension with public opinion that favors EV tax credits being made available to all, restrictions on who might avail themselves of EV credits could slow down the transition to a cleaner transportation sector.
The OPEC decision last fall to cut back oil production, and the consequent rise in gas prices at that time, emphasize the vulnerability of the U.S. transportation sector to global events—suggesting another reason to hasten the transportation sector’s decarbonization. To achieve a speedier transition, it is important to design a decarbonization policy package that can garner broad-based public support. Our research suggests that, at least for EV tax credits, public support is not affected by equity concerns or economic nationalism. Instead, the U.S. public favors faster uptake of technologies by making the tax credit available to all.