Could Plug-In Tax Credits Be Clunkers All Over Again?

I wrote a few posts this week on GM's upcoming Volt plug-in hybrid car. One of the luxuries that GM's will benefit from is a lofty tax credit of $7,500 for the first 200,000 Volts it sells. I thought it might be helpful to explain this credit, explore its implications for taxpayers and put it into perspective.

How It Works

The plug-in tax credit legislation was first passed as part of the bank bailout bill last fall, but February's stimulus package expanded it further. Originally, it would only have applied to the first 250,000 plug-in hybrids sold. The stimulus changed that to the first 200,000 hybrids sold per manufacturer. It sort of assumes that the manufacturer will sell that number within the first two quarters of its release. For the following two quarters, the credit will decrease to $3,750. The two quarters after that, it will decrease further to $1,875. Then it disappears entirely.

The Clunkers Debacle All Over Again?

It had to be embarrassing when Congress realized that it did not allocate nearly enough money for its Cash for Clunkers program. They were forced to triple its budget subsequent to the legislation's original passage. Could the plug-in credit have a similar fate? Possibly.

From the breakdowns I've seen, the stimulus package allocated around $2 billion to the plug-in vehicle credit. If GM sells 200,000 Volts, that will quickly eat through $1.5 billion of that. If it sells another 200,000 in the 6 months that follow, with the reduced credit, the program will already be about $250 million over budget. If it sells another 200,000 during the final two quarters it will end up about $625 million over budget.

The Volt's sales might not come anywhere near those targets. But the credit doesn't only apply to the Volt. Other manufacturers can create similar vehicles that can also cash in. The President has said that he hopes to see 1 million plug-in vehicles on the road by 2015. Let's hope for the taxpayers' sake that those aren't all eligible for this enormous tax credit. As this analysis shows, with competing plug-ins, it wouldn't be hard to quickly eat through that $2 billion allocation if the vehicles become popular.

Some Perspective

Just how significant is this $7,500 tax credit? It's enormous. For example, you know the terrible recession we're in that was mostly caused by the housing bubble popping? In order to try to stabilize the housing market and end the worst recession in decades, the stimulus package also offered a first-time home buyers' credit of $8,000 -- only $500 more than they're offering anyone who buys a qualifying plug-in.

That number becomes even more significant if you consider the cost of a house versus the cost of a plug-in like the Volt. The Volt is said to retail for around $40,000. The national median home price as of the second quarter was $174,000. That means the plug-in credit accounts for 18.75% of its price, while the first-time home buyers' credit accounts for just 4.6% of the price for the average home. I guess it's pretty easy to see which industry has better lobbyists.