Obama defends auto tax break despite skepticism

(Reuters) - The Obama administration on Monday defended a tax break under scrutiny that is aimed at boosting consumer interest in electric vehicles, which fell short of modest U.S. sales expectations last year.

Journalists cover the opening of the Volkwagen display on the first press preview day for the North American International Auto Show in Detroit, Michigan, January 9, 2012. REUTERS/Mike Cassese

“The program has worked,” Transportation Secretary Ray LaHood told reporters at the Detroit auto show. “It’s real money and people have utilized it.”

The administration is pushing aggressive fuel efficiency mandates for the U.S. fleet to lower oil dependence in large part through vehicle electrification. President Barack Obama envisions 1 million electric vehicles on U.S. roads by 2015, a goal industry insiders say is wildly optimistic.

The industry, while investing in battery technology is also making impressive and more affordable gains through improvements in conventional engine and transmission systems that consumers have embraced.

Administration officials are fighting skepticism in Congress and elsewhere about the wisdom of the $7,500 tax credit that mainly has benefited more well off buyers, who experts conclude would have purchased the technology without it.

Electric vehicles like the Chevy Volt made by General Motors and the Leaf by Nissan Motors are niche or “halo” products for design and technology that are more expensive than comparably sized and better-selling cars that run on gasoline.

Jeremy Anwyl, CEO of online consumer research group, said plug-ins are most popular on the West and East coasts with “early adopters,” or educated consumers passionate about using less gasoline.

“For these folks, affordability is not the issue,” Anwyl said.

Despite a heavy promotion of battery technology at the Detroit auto show and bullish predictions from executives like Nissan’s Carlos Ghosn, electric car popularity is expected by most prominent forecasters to remain incremental for years.

The segment’s popularity is challenged by gasoline prices, now sharply off their 2011 highs of $4 per gallon in the United States. Limited interest in gasoline/electric hybrids is also a hurdle with those models accounting for about 2 percent of U.S. sales that totaled 12.8 million vehicles last year.

Most recently, electric models have been the subject of safety questions. The Volt has been caught up in a federal regulatory investigation over battery fires. Fisker Automotive is also recalling all-electric Karmas over fire risk.

A survey of global auto executives released ahead of the Detroit show by consulting firm KPMG found that consumer demand for all electric-vehicles, including hybrids, will remain modest well into the next decade.

“Clearly hybrids, whether plug-in or full, are more mature and have more market presence, but this battle for the dominant technology platform will continue for years to come,” said Gary Silberg, the leading automotive expert for KPMG.

The EV tax credit that took effect in 2010 and phases out when a manufacturer sells 200,000 vehicles applies to models like the Volt, which has a small gasoline engine, and the all-electrics - the Leaf, Karma and Tesla’s Roadster.

Luxury Karmas and Roadsters range around $100,000 and are mainly considered novelties for the rich. The tax break is targeted primarily for mass market buyers of the Leaf, which can cost $35,000, or the Volt at a sticker price of more than $40,000.

Two thirds of Leaf and Volt buyers made $100,000 or more per year while more than half of that demographic had incomes of at least $150,000, according to a sampling of 2011 sales data provided by Edmunds.

Leaf and Volt sales in the United States fell short of expectations in 2011, their first full year on the market. GM sold about 8,000 Volts while Nissan sold about 9,600 Leafs.

Republicans in Congress skeptical of the administration’s renewable energy agenda are examining billions in taxpayer funds that have gone to auto-related interests since 2009, including the EV tax credit.

Republican Mike Kelly, a Pittsburgh-area auto dealer turned congressman, has introduced legislation to eliminate it.

Steve Ellis, vice president of Washington watchdog Taxpayers for Common Sense, said it is unclear whether the benefit is simply a subsidy for wealthier car buyers or a tipping point that will influence mainstream consumers.

“No one can tell you that. Industry will tell you it’s critical. Congress doesn’t know,” Ellis said.

Reporting By John Crawley; Editing by Bernard Orr