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Wall Street Journal’s Editorial Board published a generally sound and good article on the (up to) $7,500 electric car tax credit on October 10: Killing the Electric Car Credit?

However, the article contains a major error, that significantly weakens the much stronger argument that the WSJ could have made.  The error is in regards to this this sentence: “The credit is capped at the first 200,000 vehicles that each manufacturer sells, and Tesla may reach its limit for customer tax credits some time next year.”

The issue with this critical sentence is this: The credit is NOT capped at the first 200,000 vehicles.  If it were, the program actually wouldn’t be all that catastrophic.  Tesla (TSLA), General Motors (GM) and Nissan (OTCPK:NSANY) each have delivered over 100,000 eligible cars in the U.S., so they are more than half-way to the 200,000 point.

Here is the disaster, and it’s not about the first 200,000 cars.  The disaster is that there is no 200,000 limit.  The 200,000 mark only triggers a six-quarter phase-out period, during which time the quantity of eligible cars is unlimited.

Yes, you heard that right: Unlimited.

For up to six full quarters following the first 200,000 units, automakers under current law can sell an unlimited number of cars eligible for the Federal electric car tax credit.  The first two quarters, the amount is up to $7,500.  The next two quarters, up to $3,750 -- and then the final two quarters, up to $1,875.

Yes, the amount declines, but the quantity is unlimited.  It is literally a black hole in the U.S. Federal budget, for the automakers could in theory build and sell as many EVs during that time, as physics allows.  20 million cars?  Unlikely, but in theory it would be possible -- and all of them would have to be subsidized by the taxpayer.

This makes the first 200,000 units (per automaker) seem like a walk in the park.  The first 200,000 units is a big problem, but it’s peanuts compared to the second half of the program.

Therefore, the significance of the EV tax credit isn’t so much about the first 200,000 units.  It’s about the six quarters thereafter, when production capabilities have been improved and the automakers are in a better position to milk the U.S. Federal treasury with far higher unit volumes of cars, for an epic six-quarter period.

During that six-quarter period, the EV tax credit would be a giant sucking sound on the U.S. Federal treasury, given its unlimited exposure at that point.

In the interest of compromise, I suggest not just one, but two, solutions to bridge the concerns of the automakers with that of Fiscal sanity:

Alternative number one:

Simply cap the EV Federal tax credit at 200,000 units per automaker.  This will save most of the cost of the program.  Most of the U.S. Federal treasury exposure is in the six quarters following the 200,000 unit number having been achieved.  In other words, make the 200,000 number a hard limit, instead of just a starting point for the worst -- costliest -- part of the program.

Alternative number two:

Cap the EV Federal tax credit at a number a little bit below 200,000, just to show more visibly that the spending belt is tightened to some degree.  Cut it by 25%, to 150,000, and make that a hard limit indeed -- no phase-out period.

No automaker has delivered much more than 150,000 eligible cars, so they will still have a few more thousand to go, but then it ought to be all over with this “muscle cars for billionaires” subsidy.  Automakers relatively new to the EV scene will still benefit for a little while, but the number is capped -- not triggering a six-quarter unlimited period.

If the U.S. Congress can’t compromise along the lines of my two suggestions above, it should simply abolish the Federal EV tax credit effective immediately at year-end 2017.

Disclosure: I am/we are short TSLA.

Additional disclosure: At the time of submitting this article for publication, the author was short TSLA and long GM. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and equivalent, hosted by most major automakers.

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