A charged debate is underway in the Washington State legislature over whether or not to extend the sales tax exemptions for electric and alternative fuel vehicles. If no action is taken this session, the exemption will expire in July of this year.

The cost to the state for EV sales tax breaks varies greatly depending on the make and model of the car, whether one buys or leases, and if the buyer has a trade-in. Because most EV drivers are leasing, the sales tax is based on the monthly payment and not the MSRP. The means the opportunity cost of tax exemptions is less than one might think. And yet the benefits to the economy and environment are significant.

While the legislature has approved the exemption twice before, in a contentious budget cycle with fierce debate over limited revenue, questions about the efficacy of the exemption have been raised. At the same time, others are ready to double down on alternative fuel vehicles by extending tax benefits to commercial vehicles and electric motorcycles, and creating an infrastructure bank to fund new charging stations. Below, we’ve laid out the case for why going big on electric and alternative fuel vehicles is a smart strategy for Washington State, and debunked a few of the most common objections.

 

Stating the Obvious-- EVs Are Good for the Environment

EVs and alternative fuel vehicles are an essential strategy for lowering carbon emissions in Washington State.In 2011, Washingtonians emitted more than 41.9 million metric tonnes of greenhouse gases from the combustion of fossil fuels in planes, trains, and automobiles. The largest source, however, was onroad gasoline and diesel — responsible for 29.6 million metric tonnes (32%).

Luckily, Washington is uniquely positioned to develop a robust EV market. Unlike the rest of the US, which is still largely dependent on fossil fuels for electric generation, Washington’s hydro-based grid maximizes the benefits of electric vehicles. Electrification reduces emissions in two principal ways. First, energy from Washington’s electricity grid contains 75% less carbon than onroad gasoline. Second, electric vehicles use energy more efficiently, reducing total energy use by more than 75% when compared to conventional, internal combustion vehicles. The end result: EVs in Washington use little to no carbon at all.  An internal combustion vehicle would have to get 383 MPG to achieve the same greenhouse gas reduction benefits as an EV charged in Washington.

 

EVs Generate an Aggregate Economic Impact Too

The use of electric fuel drives job creation.  A widely-cited study by UC-Berkeley’s Department of Agricultural and Resource Economics found that light-duty vehicle electrification increases real wages and employment, and that dollars saved at the pump and spent elsewhere create more jobs than dollars spent on gasoline.

Analysis by Washington’s Department of Commerce shows that this claim rings true in Washington. The agency found that Electric Utilities generate 7.8 jobs for every million dollars in sales, while Petroleum & Coal products generate a mere 0.58 jobs per million dollars in sales, meaning that electric fuel sales generate 6 times more jobs than sales of fossil fuels. The fact that most of Washington’s electricity is generated in-state amplifies the benefits of choosing electric fuel by activating local supply chains. 85 percent of electricity is delivered by Northwest Utilities Inc. (based in Woodinville), and the other 15 percent is sourced principally from regional supplies.

EVs Are Smart for Consumers

The inherent efficiencies of the electric motor coupled with Washington’s cheap electricity means that EV drivers save money on fuel. A typical family driving 12,000 miles per year will save $624 annually, amounting to almost $7,000 if the family holds onto its vehicle for the average 11.2 years. Additionally, the simplicity of the EV engine (it contains less than 10 moving parts, compared to the ICE’s hundreds) allows EV owners to save by avoiding maintenance. Consumer savings are even more significant given that transportation is the second largest expenditure for the average American household.

VEHICLE 2015 MSRP Fuel Cost (Cents/Mile) Yearly Fuel Cost
EV (Chevy Spark EV) $17,980 2.6 $312/year
ICE(Honda Civic ICE) $18,490-22,840 7.8 $936/year
Savings $624 per year; $6,988 over 11.2 years

Click here to find out how much you can save by going electric!

Back to the Point: Do Tax Exemptions Work?

Ultimately, the economic and environmental impacts of EVs do not matter if we can’t get more EVs on the road. It is difficult to tease out the impact of a tax benefit when there are so many other factors at play. The first mass-produced electric vehicles from a major automaker started arriving in Washington in December 2010.EVs have made major gains since then, thanks in part to financial incentives. Washington is one of few states to surpass the 1% mark (referring to EVs as a percentage of new car sales). Only four states have crossed the 1% mark and they happen to offer some of the highest incentives (both financial and non-financial).

A study from the International Council on Clean Transportation examined the effectiveness of EV sales incentives in the United States. The study monetized all major EV incentives and found that “the total monetary benefit to consumers from state incentives significantly positively correlates with BEV sales.”

Although we often talk about incentives as they relate to consumer behavior, suppliers must respond to incentives before consumers can. Carmakers consider local demand and incentives before offering EV models in each state. Accelerating EV adoption means laying the groundwork for carmakers to expand offerings in Washington.

The Naysayers

Some policy makers and groups oppose EV tax exemptions on the grounds that they yield minimal environmental benefits, while sacrificing millions of dollars in potential revenue. Underlying their arguments are two common misconceptions:

  1. EVs are only within reach for the wealthy, who don’t care about prices.
  2. Washington’s tax exemption is not significant enough to sway people who make purchasing decisions based primarily on price (a.k.a. people in lower income brackets).

These sentiments were articulated most succinctly by Washington Policy Center, who recently said, “Washington State taxpayers will subsidize the purchase of a few thousand cars for wealthy consumers, most of whom would have made the purchase anyway.”

Are They Right?

Wealth may reduce price-sensitivity, but it certainly doesn’t eliminate it. The fact that the least expensive EV (the Nissan LEAF) is also the top-selling EV reminds us that price is most likely still a factor for EV purchasers. A survey conducted by the California Air Resources Board (CARB) revealed that EV owners tend to be wealthier, but that financial incentives still play a role in their decision to purchase an EV. Two-thirds of CARB respondents said that the California incentive--paired with the $7,500 federal tax credit-- was either "very important" or "extremely important" in their purchasing decision.

Furthermore, the concentration of EV ownership amongst wealthier individuals isn’t purely a product of EV prices. First of all, the argument that Washington’s tax exemption (along with the existing federal tax credit) doesn’t put EVs within range for the average car buyer doesn’t hold true. The average price of a new car in Washington was $32,531 in 2014. The sales tax exemption plus the federal tax credit lowers the price of the the Nissan LEAF well below the average price of a new car. And second, early adopters of any technology tend to be wealthier, as do the majority of new car buyers. People ages 51- 69 continue to be the largest group of new car buyers (making up 38 percent of new car sales), and this group enjoys a higher median household income than other age groups.

The Next  Five Years

Even with financial incentives, EVs (like many other cars) will not become affordable for everyone. What really matters is whether or not they become affordable for individuals who are likely to purchase a new vehicle over the next 5 years (the length of the extension of EV tax exemptions). The question then becomes: do tax exemptions make EVs a smart choice for prospective new car buyers?

Consumer surveys (like the CARB survey mentioned earlier and the J.D. Powers’ 2013 Avoider Study) show that fuel-savings and environmental concerns currently drive EV purchases. However, these drivers are changing alongside the demographics of new car sales. Deloitte predicts that Gen Y (also known as the “Millennials”) will account for 40 percent of new-car purchases by 2020. EV makers are already lowering prices to capture this demographic, which names price as the number one impediment to owning a vehicle. Gen Y consumers are also likely to consider EVs-- Their affinity for all things tech extends to cars and they are particularly interested in fuel efficiency.

Reaching the Tipping Point

The initial loss of public revenue from EV tax exemptions dramatically outweighs the benefits that Washington stands to gain as EV market share increases. The sooner we can build a critical mass of EV owners, the sooner EVs will go from niche to mainstream. EV adoption depends on a confluence of factors (gas prices, infrastructure, information, public attitudes, etc.), of which price is only one. We can’t expect EVs to replace conventional vehicles in the next five years. We can, however, push EVs towards their tipping point by extending and modifying the existing tax exemptions. This is an appropriate measure for the state to take as part of a long-term carbon reduction strategy. It will benefit Washington families and businesses, while lowering greenhouse gas emissions.

NOTE: SB 5333, 5357 and 5325 are scheduled for public hearing in the Senate Committee on Transportation at 3:30 PM on Wednesday, February 4th. SB 5445 is scheduled for public hearing in the Senate Committee on Energy and Environment & Telecommunications at 1:30 PM on Thursday, February 5th.The hearings will be televised on TVW.

Below is a brief description of each of the bills going to hearing.

Bill Number Sponsors Description
SB 5333 Senators Mullet, Litzow, Hill, McCoy and Jayapal This bill extends the EV tax break until 2021, adding a cap wherein only the first $45,000 are exempted. This bill also establishes an infrastructure bank to provide low-interest loans for expanding EV charging stations.
SB 5445 Senators Liias, Litzow and Jayapal *Requested by Governor Inslee This bill delays the expiration of the EV tax exemption until July 1, 2025, with a cap of $60,000.
SB 5325 Senators King, Hobbs, Litzow, Liias, Fain and Ericksen This bill extends the EV tax exemption to commercial use vehicles.
SB 5357 Senators Jayapal, McCoy, Litzow, Mullet, and Keiser This bill provides a Sales & Use tax exemption for motorcycles, with a cap of $45,000.