Tesla shows how tax credits push prices up

Minnesotans suffer from higher-than-average prices for accommodation and childcare. In both cases, the cause is excessive taxes, fees, and/or regulations, imposed by government, which restrict supply relative to demand and keep prices elevated. Sadly, in the case of both accommodation and child care, Gov. Walz does not want to remedy the underlying problem — by reducing the burden of those excessive taxes, fees, and/or regulations — he just wants to treat the symptom, the high prices, by having taxpayers pay them.

In the case of childcare, he:

…proposes to expand tax credits so that families making under $200,000 with one child could receive up to $4,000 a year for childcare costs, families with two children could receive up to $8,000, and families with three children could see up to $10,500.  

All this will do is pump more demand into a sector where supply is constrained. The result is likely to be even higher prices for childcare.

Tesla shows this dynamic in action. Recently, Associated Press reports:

The Treasury Department revised vehicle classification definitions to make more EVs — including SUVs made by Tesla, Ford and General Motors — eligible the full $7,500 [electric-vehicle tax credit in the Inflation Reduction Act].

The result:

Tesla has raised prices on its Model Y in the U.S., apparently due to rising demand and changes in U.S. government rules that make more versions of the small SUV eligible for tax credits.

The Austin, Texas, electric vehicle company bumped up the price of the Model Y Long Range version by about 2% to $54,990 and the Performance version by about 2.7% to $57,990, according to its website. The prices exclude shipping and an order fee.

What makes this situation especially bad is that these are subsidies to better-off households:

Under the sweeping law approved last summer, pickup trucks, SUVs and vans with a sticker price up to $80,000 qualify for EV tax credits, while new electric cars, sedans and wagons can only be priced up to $55,000. The rule had disqualified some higher-priced SUVs, such as GM’s Cadillac Lyriq and some versions of the Model Y, prompting complaints from Tesla and other automakers.

So now, people who are shopping in the $80,000 range for a vehicle will get taxpayer dollars to help them. The other big winners are the EV manufacturers:

The January price cuts apparently worked. On Tesla’s earnings conference call last week, CEO Elon Musk said that so far in January the company had seen the strongest number of orders year-to-date in company history. He also said the company had raised the Model Y price “a little bit in response to that.”

As with childcare, the EV tax credit doesn’t reduce the cost of EVs, it just transfers that cost onto the taxpayer. And when you’re spending other people’s money, there is little incentive to get prices down. You can expect to see pressure for these tax credits to be expanded in the future as prices continue to rise.