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Levine: Well Intentioned but Poorly Designed; EV Subsidy Programs Need Improvements to Be Effective

Question: How can a new car priced at $39,000 be less expensive than one with a $23,000 price tag?

Answer: When implementation of government incentive programs make the car appear more expensive than it actually is.

That’s the reality surrounding plug-in electric vehicles (PEVs). The goal of the incentives provided by the state and federal government is to increase the number of PEVs purchased, and as a by-product, increase demand which in turn will spur research into new PEV technology. PEVs produce little to no greenhouse gasses, have no tailpipe emissions, and reduce the need for oil extraction and the dependence on foreign oil.  The government’s calculation is clear; the environmental, health and economic benefits of increased PEV sales will be significantly greater than the cost of the subsidy.

The Federal program offers a $7,500 tax credit for most PEVs.  However, a tax credit means all but the wealthiest and most sophisticated consumers won’t reap the benefit until the end of the tax year.  Someone who buys a PEV in April of 2013 will have to wait until they file their taxes in April of 2014 to receive the credit. And even then, the beneficiary of the credit must have a tax burden greater than $7,500 to realize the full amount of the credit.

In 2012, after all other deductions are taken; joint tax filers must have a taxable income of $52,487 in order to receive the full $7,500 credit. The median U.S. household income in 2011 (the last year data is available) was $50,054. While not an absolutely direct comparison, it is close enough to easily see that the majority of taxpayers fall below the income level necessary to receive the full credit.

In California, instead of a delayed tax credit, PEV purchasers get a direct, cash rebate of up to $2,500.  However, while the state rebate is available to ALL who purchase a PEV, the process for claiming it is cumbersome. It requires that the consumer fill out an online "pre-application", and then, once "approved" mail in a lengthier application. The process results in a 30-60 day wait to receive the rebate check in the mail.

The biggest flaw in both programs, however, is that they don’t reduce the initial "sticker price" of the car. The changes necessary to fix this problem would alter the program in such a way as to remove the other problems at the same time.

When consumers walk onto a dealer’s lot, one of the first things they look at is the bottom line price on the window sticker. People may look at different brands, or be curious as to what a specific model costs, but when it comes time to purchase, the decision is based on finding the best available car at the consumer’s chosen price point.  For PEVs that price does not include the guaranteed state and federal incentives.

For example, Ford sells seven models of the Focus. Six of those models are conventional gas powered cars.  Those six cars range from $16,200 to $24,200. The seventh model of Focus is a PEV and has a MSRP of $39,200. If a consumer is looking to spend "in the mid $20s", there is no way he or she will consider the PEV.

The difference is so great that PEVs are rejected out of hand by all but a small number of consumers for whom the environmental benefits are more important than the price.  And while it is tempting to say it is the job of the sales person to inform potential customers about the incentives, imagine your reaction if a sales person tried to sell you a car with a sticker price more than 25% higher than the price you stated.  Any explanation would likely be rejected as doublespeak aimed at trying to "up sell" for a greater commission.

The incentive programs need to be redesigned with consumer behavior in mind. Since the goal is to encourage the purchase of a PEV, the customer’s "first impression" (the sticker price) should be as low as possible; it should include the incentive.  If that were the case the Ford Focus would have a sticker price of $29,200. That would put the car much closer to the price of the other models.  The sales person then could have a conversation about the cost of electricity versus the cost of gasoline. The EPA estimates an average Ford Focus driver will save between $8,000 and $9,000 in fuel costs over five years of operation. The combination of the incentives and the fuel savings reduce the five year purchase and operating cost of the car to $22,000 or less, making it cheaper to own and operate than three of the gas powered models.

Heath Carney, a PEV sales specialist from John L. Sullivan Chevrolet, believes that to remedy the problems and make the incentives more effective, the programs should be changed to make the process easier for and more readily beneficial to consumers.

When asked how he would improve the programs, Mr. Carney suggested using another successful government incentive program as a model, saying, "Ideally, they can be applied at the dealership at the date of the sale, as in Cash for Clunkers, in a manner that is simple for all involved."

That is currently how it works for people who lease a PEV; the federal tax credit goes to the dealer, not the lessee.  There is no reason that a purchase should be any different.  The state rebate, which currently goes to the consumer in both leases and purchases, should also flow to the dealer to make the benefit immediate, and remove any need for action by the consumer.

As part of making those changes to the program, the dealers ought to be allowed/required to reflect the lower price in the sticker price.  This approach wouldn’t cost more money. But it would allow consumers to see a lower, more accurate initial price. The lower price would broaden the base of potential customers. It would also eliminate paperwork and delays. The result would likely be in an increase in PEV purchases, which is the purpose of the incentives in the first place.