Effects of Federal Tax Credits for the Purchase of Electric Vehicles

CBO estimates that federal policies to promote the manufacture and purchase of electric vehicles, some of which also support other types of fuel-efficient vehicles, will have a total budgetary cost of about $7.5 billion through 2019. Tax credits for buying electric vehicles—which account for about one-fourth of that cost—are likely to have the greatest impact on vehicle sales. The electric vehicles that are the focus of this study fall into two broad classes:

• Plug-in hybrid vehicles are powered by an internal combustion engine, which runs on gasoline or other liquid fuels, and by an electric motor, which is powered in part by an externally rechargeable battery. 
• All-electric vehicles, also known as battery electric vehicles, run entirely on battery power.

Do the Federal Tax Credits Make Electric Vehicles Cost-Competitive?

At current vehicle and energy prices, the lifetime costs to consumers of an electric vehicle are generally higher than those of a conventional vehicle or traditional hybrid vehicle of similar size and performance, even with the tax credits, which can be as much as $7,500 per vehicle. That conclusion takes into account both the higher purchase price of an electric vehicle and the lower fuel costs over the vehicle’s life. For example, an average plug-in hybrid vehicle with a battery capacity of 16 kilowatt-hours would be eligible for the maximum tax credit. However, that vehicle would require a tax credit of more than $12,000 to have roughly the same lifetime costs as a comparable conventional or traditional hybrid vehicle.
Assuming that everything else is equal, the larger an electric vehicle’s battery capacity, the greater its cost disadvantage relative to conventional vehicles—and thus the larger the tax credit needed to make it cost-competitive.

Read more: http://www.cbo.gov/publication/43576