The Inflation Reduction Act was intended, as its title suggests, to reduce inflation. In truth, the moniker is far from accurate.
Despite the IRA’s many energy subsidies and other costly provisions, Senate Democrats promised the law would reduce deficits by more than $300 billion over a decade. Fiscal hawks voiced skepticism of such rosy projections at the time. And subsequent analysis, particularly of electric vehicle tax credits, has proved them right. Data confirm that advocates of the IRA greatly understated its costs, and that the bill is a boondoggle, primed to sap still more funds from the already dangerously indebted American public.
A recent Goldman Sachs report estimates that the IRA’s green energy subsidies will likely cost taxpayers $1.2 trillion over the next decade. That’s more than three times the Congressional Budget Office’s projected $391 billion. Clean vehicle subsidies are a prime culprit: Although forecasted to cost just $14 billion, they may cost roughly $390 billion, according to analysis from the Brookings Institution. Another issue is the tax credit to manufacturers for EV battery cells and modules. While the CBO tagged this program at $30.6 billion, the Mercatus Center’s Christine McDaniel explains its true cost could reach $196.5 billion.
Government subsidies generally cost more than expected. First, policymakers have political incentives to obscure their proposals’ true costs with budget gimmicks and other deceptions. It’s also a matter of basic economics. When something becomes cheaper, more consumers will purchase it. Thus, when Washington offers generous tax credits, they are artificially lowering the production and consumer prices associated with EVs. Rational economic actors reorient their financial plans accordingly. Consumers who would otherwise buy a cheaper traditional car may now choose a subsidized EV. But such subsidies alter vehicles’ prices, not their costs. The difference will be paid by American taxpayers.
Perhaps worse, Democrats’ enthusiasm to turn consumer vehicles electric is fundamentally ill-considered. “Transportation may be 20 percent of emissions, but cars and vans represent only 8 percent, and 72 percent of these are personal vehicles—which means they sit idle most of the time,” observes Holman W. Jenkins Jr., a member of the Wall Street Journal’s editorial board. “Global society’s personal vehicles may be a majority of cars, but they account for a minority of light-vehicle emissions—about 39 percent, or 3 percent of total emissions,” he adds. Jenkins Jr. further calculates that, given America’s share of the global fleet (12%), and EVs’ typical 50% lifetime emissions reduction, even the most hard-line EV mandates would eliminate just 0.18% of total emissions.
The IRA’s EV incentives will promote market inefficiencies that will further burden American industry and consumers. “Economics is the study of the use of scarce resources which have alternative uses,” economist Thomas Sowell writes in Basic Economics. Prices, if left undistorted by governments, direct market actors toward using scarce resources with maximum efficiency. When governments intervene, businesses often choose less efficient strategies in pursuit of subsidies. This is exactly how the IRA is playing out: The bill incentivizes manufacturers to produce higher-cost EVs to the exclusion of cheaper and otherwise more profitable traditional vehicles.
Similarly, the law ties subsidies to domestic production, which may well cause manufacturers to forgo more profitable foreign investments to build domestically. Indeed, Tesla reportedly did just that. Such inefficiencies, however hard to quantify, increase prices for consumers and should not be discounted in policy analysis.
Moreover, the IRA’s benefits will be enjoyed primarily by well-off Americans, while its costs will land hardest on the poor. EVs are a luxury good. On average, they cost $61,500, while traditional vehicles cost just $49,000. According to data from 2020, 57% of battery EV owners earn six figures annually, and 53.6% are aged 55 or older. In short, the IRA cuts a thick slice of pork for financially stable Americans at everybody else’s expense.
Meanwhile, working-class America is still struggling to find affordable transportation. New car prices soared as never before during the pandemic, and the used car market is floating about 30% above pre-pandemic prices. On top of that are outrageous gas prices, to which Biden also contributed immensely. Subsidized inefficiency will not blunt this inflation.
“In politics … the costs of the government’s mistakes are often paid by the taxpayers,” Sowell notes, “while the costs of admitting mistakes are paid by elected officials.” Don’t expect Biden and the Democrats to close out their tab.
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David B. McGarry is a policy analyst at the Taxpayers Protection Alliance.