President Joe Biden test drives the Hummer EV during a tour of the General Motors Factory ZERO electric vehicle assembly plant, Wednesday, November 17, 2021, in Detroit. (Official White House Photo by Adam Schultz)
Anyone who has taken a rudimentary course in economics has learned about the dead-weight loss of subsidies and how they deprive good taxpayers of their money while creating problems in the economy. But, as politicians are wont to do, anytime they see an opportunity to “do something,” they go ahead and do it, regardless of the evidence. Many politicians thought they could bring “green jobs” to their states and cities by offering up subsidies (also known as tax breaks or incentives). Now it turns out that subsidies are the same as they ever were, bad economics. Marc Joffe and Scott Lincicome explain the problems with the electric vehicle subsidy craze that has recently taken hold of state politicians. They write:
As electric vehicle demand and production stall, gubernatorial dreams of new green manufacturing jobs are being deferred in multiple states. Governors “bought” these now elusive jobs by dangling incentive packages in front of EV manufacturers, competing with their counterparts in other states for new and expanded plants. Now these facilities are being delayed and downsized, and some may never materialize. The EV experience illustrates the downsides of the state incentive arms race and calls upon us to think of ways to de-escalate.
After rising rapidly in the early 2020s, monthly Battery Electric Vehicle sales (excluding hybrids) have stalled out at about 100,000 per month since mid-2023. And as manufacturers and dealers increase incentives to move cars off the lot, final sales prices are not keeping pace with inflation, crimping profitability.
The EV market is struggling to move beyond the early adopter phase, because EV ownership presents real concerns for mainstream buyers. Reliable, fast charging remains elusive in much of the country, and range anxiety still remains very real, especially in colder regions. EVs are significantly more expensive to insure and are vulnerable to more rapid depreciation.
Unless the EV market rebounds, more plant downsizings and construction suspensions are likely, raising the question of whether governments should have spent time, effort, and tax dollars competing for these plants in the first place.
Governors, state development agencies, legislatures, and local government partners were not fully aware of these limitations when they offered manufacturers over $17 billion in incentives to build and upgrade EV facilities across thirteen states between 2021 and 2023. These totals are based on a Cato Institute analysis of data from Good Jobs First, and appear in our new Policy Analysis, “Reforming State and Local Economic Development Subsidies.”
But now, some of these states are experiencing disappointments, with the most notable setbacks occurring in Michigan, Georgia, and North Carolina. In Michigan, Ford Motor Company has scaled back a plant in the City of Marshall that had been granted $1.7 billion in incentives in 2023. Meanwhile, Rivian Automotive, citing a need to conserve capital, indefinitely paused construction on an EV plant in Stanton Springs, Georgia, after being promised $1.467 billion in state and local incentives.
Vietnamese EV-maker VinFast first scaled back and then paused construction on a Chatham County, North Carolina, EV plant for which it garnered $1.254 billion in tax breaks in March 2022. Most recently, VinFast announced that the plant would begin production in 2028—four years later than originally planned.
Unless the EV market rebounds, more plant downsizings and construction suspensions are likely, raising the question of whether governments should have spent time, effort, and tax dollars competing for these plants in the first place. And the problem extends beyond the EV industry: Governments compete for companies in semiconductors, aerospace, and other industries, committing tens of billions annually to target employers.
Unfortunately, states are caught in a prisoner’s dilemma: They might like to stop offering development incentives but fear that competing states will continue do so, thereby “taking away” future employers. So, like prisoners deciding whether to confess and rat out one another in hopes of leniency, state government officials are loath to unilaterally drop their corporate subsidy programs.
But subsidy disarmament can be achieved through an interstate compact under which some or all states agree to abstain from offering incentives. According to the National Center for Interstate Compacts (NCIC), there are at least 192 interstate compacts covering a wide range of issues, including Adult Offender Supervision, Placement of Children, and Driver Licenses. Subsidy restraint could be another opportunity for interstate agreement.
Between 2019 and 2021, The Coalition to Phase Out Corporate Tax Giveaways, a bipartisan group of state legislators, made an effort to stop corporate incentives through an interstate compact. Legislators in fifteen states introduced bills to prevent their respective states from offering “taxpayer dollars to induce a facility in another state that has joined the agreement to move to the offering state.”
While this effort lost steam during the post-COVID government spending spree, now is a good time to revive it. States and local governments are facing renewed budgetary pressure, and, as we have seen with the case of EVs, putting together incentive packages may prove to be a waste of effort.
Read more here.
If you’re willing to fight for Main Street America, click here to sign up for my free weekly email.
