The Perils of the EV Incentive Arms Race: Governors' Green Dreams Deferred

As the demand and production for electric vehicles (EVs) stall, the ambitious plans of state governors to attract new green manufacturing jobs are being put on hold. Governors had dangled lucrative incentive packages in front of EV manufacturers, competing with their counterparts in other states to lure these coveted facilities. However, the reality is that many of these promised plants are now facing delays, downsizing, or may never materialize at all. The EV experience serves as a cautionary tale, highlighting the pitfalls of the state incentive arms race and the need to find ways to de-escalate this costly competition.

Navigating the Turbulent EV Market: Challenges and Setbacks

The Stalling of EV Adoption

After experiencing rapid growth in the early 2020s, monthly Battery Electric Vehicle (BEV) sales (excluding hybrids) have plateaued at around 100,000 units per month since mid-2023. As manufacturers and dealers increase incentives to move cars off the lot, final sales prices are not keeping pace with inflation, putting a strain on profitability.

Barriers to Mainstream Adoption

The EV market is struggling to move beyond the early adopter phase, as mainstream buyers face real concerns. Reliable and fast-charging infrastructure remains elusive in much of the country, and range anxiety continues to be a significant issue, especially in colder regions. Additionally, EVs are significantly more expensive to insure and are vulnerable to more rapid depreciation, further deterring potential buyers.

Governors' Misplaced Optimism

State governments, including governors, development agencies, legislatures, and local 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. This data is based on a Cato Institute analysis of information from Good Jobs First, as detailed in their recent Policy Analysis, "Reforming State and Local Economic Development Subsidies."

Setbacks and Disappointments

The reality of the EV market's struggles is now becoming apparent, with several states experiencing significant setbacks. Michigan, Georgia, and North Carolina have been particularly hard hit. 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. Rivian Automotive, citing a need to conserve capital, has 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 has 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, with the plant now expected to begin production in 2028 – four years later than originally planned.

The Broader Implications

Unless the EV market experiences a significant rebound, more plant downsizings and construction suspensions are likely. This raises the question of whether governments should have invested time, effort, and tax dollars competing for these plants in the first place. The problem extends beyond the EV industry, as governments compete for companies in various sectors, including semiconductors and aerospace, committing tens of billions annually to target employers.

The Prisoner's Dilemma of State Incentives

States are caught in a classic prisoner's dilemma when it comes to offering development incentives. While they may prefer to stop offering these incentives, they fear that competing states will continue to do so, potentially "taking away" future employers. This reluctance to unilaterally drop corporate subsidy programs is akin to prisoners deciding whether to confess and rat out one another in hopes of leniency.

Towards a Solution: Interstate Compacts

One potential solution to this dilemma is the establishment of interstate compacts, where some or all states agree to abstain from offering incentives. The National Center for Interstate Compacts (NCIC) reports that 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. While this effort lost momentum during the post-COVID government spending spree, the current budgetary pressures faced by states and local governments, coupled with the lessons learned from the EV experience, present a compelling case to revive this initiative.