Build Back Better — Better!

8/10/21

As anyone paying any attention knows, an effort is underway to draft what will likely be a second, larger infrastructure bill, projected to come in with a price tag of as much as $3.5 trillion. That legislation, if it ever comes to fruition, is likely to contain billions of dollars allocated to mitigating the effects of climate change.

It remains to be seen what the Congress will pass, but it appears that in connection with the climate issues, the legislation will likely support initiatives spelled out in a White House fact sheet relating to expanding electric vehicle charging stations across America. Additionally, it appears that other incentives will be offered with the intent of weaning the US off fossil fuels to power cars and trucks.

With respect to the new charging stations that will be built with federal dollars, the fact sheet specifies three specific actions to be taken by federal agencies:

1. Grants to be extended in connection with developing “alternative fuel corridors” consisting of 500,000 charging stations throughout communities across the country.

2. Funding and partnerships for charger-related research and development.

3. Efforts to transition all federal vehicles to zero-emission vehicles.

I wholeheartedly support numbers 2 and 3. Number 1, not so much. My reservation is in keeping with my traditional reluctance to provide financial subsidies to the private sector — particularly to profitable institutions. Grants accrue to the benefit of company owners, who stand to enjoy profits that derive from market forces. I’d expect these charging stations to ultimately turn a profit, with or without the government grants; and assuming that’s the case, any federal assistance for privately held charging stations should be limited to loans with the expectation of a payback, rather than grants. Beyond that, the Federal government should stand committed to do whatever it can to assist the businesses that are ready to invest in these ventures to help them overcome the inevitable local resistance that may likely retard the construction of these charging stations. That’s a burden that these companies shouldn’t have to bear when their services are in the national interest.

The Biden administration has also set a goal to have electric cars representing half of all new car sales by the end of a decade. Toward that end, it appears that a federal subsidy of as much as $7,500 for purchasers of new electric vehicles is under consideration. Such a subsidy, in its current form, is a lousy idea and should be scrapped.

By way of background, fiscal policy involves the use of government spending and tax collections both to finance and pay for desirable government services (e.g., public safety, public health, national defense, education, etc.) as well as to foster some desirable behavior (e.g., discourage smoking, encourage home ownership, etc.) The idea of encouraging the use of electric vehicles falls into the latter category of fiscal policy; and within that realm, we have three alternative means of incentivizing the desired behavior: We can directly spend federal dollars on those who buy (or use) electric cars; we can reduce taxes for those who buy (or use) electric cars; or we can impose taxes on those who don’t use electric cars.

With the first and second approaches, the subsidy goes to the new-car-buying public – many of whom would be buying the electric vehicles anyway, without the payment or tax credit. Either way, the government check or the lower taxes puts money directly into the pockets of relatively rich people.

The third category can be broadly described as taxing undesirable behavior — that is, the behavior of people who continue to be using gasoline-powered cars. By far, this third category is my preferred approach. The easiest thing would be to raise the tax on gasoline, which, of course, would incentivize people to transition away from a reliance on fossil fuels. Admittedly, this tax would be broad based, and those in the lower income brackets would be hardest hit; but these effects could be mitigated by granting a gasoline tax credit for lower income households who have to rely on older, traditional combustion engine cars.

I like the idea of electric cars as much as the next guy — maybe more so. But any legislative fix should be designed properly; and a guiding principle for me is that incentives should be structured in a way that doesn’t just benefit rich folks. Grants to profitable companies and subsidies without any means testing should be out of bounds.