Environmental Goals and Progressivity: Evaluating the Income-Based Eligibility for EV Incentives

• In Event: From Gas Tanks to the Grid: Impact of Taxation on Energy Consumption

Abstract

This paper studies the income-capped federal electric vehicle (EV) subsidy in the US and its implications for environmental outcomes and redistribution. Prompted by concerns that the EV tax credits are disproportionately claimed by higher-income taxpayers, the Inflation Reduction Act of 2022 introduces an income cap, disqualifying individuals with AGI above $150,000 from claiming any tax credits. While this increases the progressivity of the allocation of the subsidy, it may reduce efficiency or environmental benefits when income-based preferences and externalities vary across households. This paper studies the trade-off between environmental goals and redistributive motives in an optimal taxation framework. First, I estimate the effect of income-based eligibility using zip-code level variation and find that a 1% reduction in subsidy eligibility near the income threshold leads to a 0.8% decline in EV sales, implying a price elasticity between –9.4 and –2.1 for marginal buyers. Second, I develop a welfare model that characterizes the optimal EV subsidy under an income cap and derive sufficient statistics for policy design. The optimal subsidy rises with the covariance between household-level externalities and price responsiveness, and with the progressivity of subsidy allocation. Third, I estimate these sufficient statistics using both reduced-form and structural approaches. Finally, I use simulations to illustrate the trade-off between environmental goals and redistribution and report the optimal subsidy rate and cap. This framework generalizes to other settings where income-based eligibility is used, especially when redistributive constraints interact with externalities.

Author

• Eva Wang, yiyunw@umich.edu