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The Economics of Electric Cars

Once deemed a pipe dream, electric and hybrid electric cars are beginning to gain mainstream appeal. When you compare them to standard internal combustion-powered vehicles, however, they come out quite expensive. The logic behind the added expense is that they pay for themselves in fuel savings and also carry the long-term bonus of being better for the environment. So when the rubber meets the road, how do these vehicles actually stack up?

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Purchase Price

If you’re considering buying a hybrid or fully electric car today, you owe a debt of gratitude to those who paid a premium of 100% or more over the cost of a gasoline-powered car the last 15 or so years. Early adopters pushed sales enough to substantially lower the cost of many of the current crop of cars. The high end of the market may be out of reach for most consumers, but it’s not too far out of step with comparably equipped gas-powered cars.

The Tesla Model S, which costs $80,000 or more depending on options, includes free lifetime access to its network of supercharging stations. BMW’s very sporty i8, by contrast, sits near the top of the market at more than $150,000.

BMW also offers the i3 fully electric vehicle for an MSRP of $41,350, plus options that can quickly raise the price to well over $50,000. Both BMW and Mercedes have hybrid models that share their middle and lower price range with traditional models.

Fuel Savings

Hybrid and fully electric cars are marketed as fuel- and money-saving vehicles, and the numbers back up the claim. In 2013, when gas was an average of $3.75 per gallon, the average cost savings for a fully electric Chevy Volt versus a Nissan Sentra was about $800 per year, based on 15,000 miles. That’s a savings of $4,000 over five years. However, the MSRP of the Volt is almost twice that of the Sentra, but that’s not the whole story on the cost.

Tax Credits

Car salesmen will cheerfully inform you that there is a $7,500 tax credit for hybrid and fully electric vehicles and that the credit lowers the cost of the car. Yes, it is true that the credit is available, and yes, it is true that everyone is entitled to it. Whether it lowers the price of your car by $7,500, however, is another story altogether because of the way the federal tax credit works.

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The federal tax credit for hybrid and electric vehicles is non-refundable. So if you’re single with no children and earn $45,000 a year, the most you will get is about $4,775. If you’re married with two children and your household income is $75,000, the most you will save is $5,300.

The same rules usually apply to state income taxes in states that offer tax credits. That doesn’t make it a bad deal; it just means you should consider your actual tax situation before discounting the purchase price.

More Bad News

The state and federal tax credits are not available on all hybrid and electric vehicles, and you should check with a tax professional first. Other restrictions on the tax credit include that it only applies to new vehicles and the car must be for personal use. That means that if you own a small business, you can’t buy the car in the business’s name. Finally, if you lease, you may lose the credit entirely, since the credit will go to the leasing company that actually owns the vehicle.

The Final Word

An uncomfortable reality of buying any new car is depreciation, which eats away at a car’s value at a predictable rate. The problem with electric and hybrid vehicles is that the rate of depreciation has not settled into a predictable pattern yet, the reason largely being that the technology is so new. The cost of replacement batteries, for example, can be substantial, and since they have not been around long enough to know how long they will actually last, depreciation can’t be accurately calculated.

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Factoring in the unknown future cost of replacement batteries into resale value or as part of your long-term cost of ownership is murky. Advances in battery technology have been extending their life and lowering costs, but progress seems to be happening in fits and starts. This is not a reason to avoid these cars, just another factor to consider.

Photo credit: flickr

Frank Addessi Born and raised in the center of the known universe, Brooklyn NY, and currently hiding out in the bucolic hills of northeast Pennsylvania writing about personal finance. His expertise includes personal loans, credit cards and retirement. It's not easy living the American Dream but someone has to do it!
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