Car driving uphill with environmentally friendly landscape coming from its exhaust

Hanna Barczyk

Want Consumers to Buy Electric Cars? Give Them Tax Credits

In an effort to address carbon emissions, governments worldwide are trying to inspire consumers to make more eco-friendly purchases, including of big-ticket items such as solar panels and electric vehicles. US president Joe Biden is among the policy makers who have embraced offering consumers tax credits and rebates, even though there has been scant evidence that such incentives work well or are cost-effective.

Now, research by University of Wisconsin’s Cheng He, University of South Carolina’s Ö. Cem Öztürk, Georgia Institute of Technology’s Chris Gu, and Chicago Booth’s Pradeep K. Chintagunta provides this support, particularly for using tax credits to encourage electric-vehicle purchases. They find that tax credits are effective, relatively low cost compared with alternatives, and benefit many middle-class families.

The researchers analyzed three US states that offered tax credits to buyers of some electric vehicles and find that middle-class households responded to the credits, whose effects lasted even after the incentives concluded, according to the study.

Green cars—which include hybrid, plug-in hybrid electric, and fully electric vehicles (PHEVs and EVs, respectively)—consistently make up a tiny percentage of the US auto market, just 4 percent in 2019, according to the US Department of Energy. A handful of studies find that demand for EVs is associated with factors such as charging infrastructure. After all, people shopping for electric cars want to know they’ll be able to power up when needed.

But it’s been unclear whether, and how much, incentives such as tax credits drive demand.

He, Öztürk, Gu, and Chintagunta focused on three US examples of state tax credits for plug-in hybrids. South Carolina introduced tax-credit incentives for plug-in hybrids in January 2012 ($2,000) and Colorado did so in May 2013 ($6,000). Oregon implemented a similar $1,500 tax credit between December 2009 and December 2011. The researchers estimated the incremental sales impact of the incentives, looking at what happened in individual counties.

They analyzed all transactions conducted at a random sample of dealerships, along with the zip codes of buyers and responses to postpurchase survey questions. They also obtained annual county-level data on demographic variables such as population, education, income, and commuting time from the US Census Bureau’s American Community Survey.

Overall, unit sales of plug-in hybrids covered by the tax credits increased by 3.7 percent in South Carolina and 1.7 percent in Colorado, on average, and the sales boost lasted even after the incentives expired in Oregon, the researchers find—perhaps because the credits increased awareness of the advantages. Sales of other cars, including those that are considered eco-friendly but didn’t qualify for the credits, didn’t see a boost.

He et al., 2021


Researchers’ note on data: The relatively small size of South Carolina’s EV market and the 20 percent random sample of dealers data contribute to the noisy estimates in the figure.

While the overall sales increase is significant, the researchers note that the incentives were far more effective in some counties than others, boosting sales up to 53 percent in certain areas. Sales were linked to demographic factors associated with demand, such as income level. There were 24 percent more plug-in hybrid sales in Democratic counties than Republican ones. The researchers note the importance of including local preferences and factors in any analysis, noting that an aggregate state-level analysis would produce different results.

Countering concern that tax credits for eco-friendly cars mainly benefit well-off families, the researchers find that the credits helped many middle-income families, as well. The tax credits didn’t have much effect in counties with the lowest median income, and they mainly attracted consumers who were already considering EVs. However, they also raised sales in counties where consumers valued cost savings more. The sales boost from the incentive “comes mainly from the counties with lower-middle median income,” the researchers write.

The increased demand can be attributed mostly to people switching from fuel-efficient gasoline vehicles, as opposed to gas guzzlers, which dampened the tax credits’ efficiency in reducing carbon emissions.

Biden’s climate-change plan would restore credits, target middle-class consumers, and prioritize vehicles made in the United States. The last goal is notable, the research suggests. “Our findings indicating a significant positive impact of the tax credit incentive on the sales of a PHEV made in America (i.e., Chevrolet Volt) in lower-middle-income counties are consistent with the theme of the President’s climate plan,” write He, Öztürk, Gu, and Chintagunta.

Tax credits on PHEVs may be a low-cost way to reduce carbon emissions, they conclude. They estimate that the average cost of curbing emissions this way is $109 per metric ton, which is less than the costs calculated by prior studies that have looked at tax rebates for conventional hybrid vehicles, residential solar-panel subsidies, and solar feed-in tariffs (which pay solar buyers to send electricity to the grid). But, note the researchers, the $109 per ton still “exceeds the $75 carbon tax proposed by the IMF based on the Paris Agreement’s goal in limiting global warming.”

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