A proposed expansion of the $7,500 electric vehicle tax credit has become another polarizing issue, both for fiscal conservatives (“boondoggle … don’t need it”) and liberals and environmental advocates (“an important tool to slow climate change”). It is of greatest interest to Tesla and General Motors, which have already hit the cap. GM is still in the wind-down phase, with a maximum one-quarter credit, or $1,875, for the six months starting next month. Nissan will likely hit the cap in 2-3 years. Ford and Toyota may get there by 2025.
A proposal in front of Congress would expand the tax credit by another 400,000 vehicles per automaker for a total of 600,000. The maximum tax credit would become $7,000, not $7,500, and it would continue t0 apply to purely electric vehicles as well as to plug-in hybrids, but not to hybrids that only go a mile or two on battery power.
Bill Before Congress
Tax credits for electric vehicles and plug-in hybrids have been available since 2010. Tesla, by far the largest seller of EVs in the US, has maxed out is tax credit allocation, and General Motors is winding down its tax credits during a 12-month phaseout period. (See below for more details.)
In April, Senators Debbie Stabenow (D-MI), Lamar Alexander (R-TN), Gary Peters (D-MI), and Susan Collins (R-ME), along with Congressman Dan Kildee (D-MI), introduced the Driving America Forward Act that would extend the phaseout of the federal EV tax credit. The legislation, if enacted, could include cars purchased between the phaseouts for Tesla and GM. Or not. Or it could be a partial credit, as people bought with little expectation of getting tax credit money. (But legislation with no provision for interim-period credits would drive EV sales close to zero in the months before passage.)
Proponents say the tax credits help drive buyers toward cleaner electrified vehicles during the period when battery technology is still costly. They note the government subsidizes other forms of energy-reducing transportation such as buses and commuter rail. There are subsidies for rebates for efficient houses, furnaces, appliances, and even light bulbs. (Some LED bulbs after energy company rebates are little more than $1 a bulb.)
While critics blame President Obama, the tax credit was passed in the George W. Bush administration, in the Energy Improvement and Extension Act of 2008.
“It’s hard to imagine a more blatant income transfer for the well-to-do,” says a Sept. 3 Wall Street Journal, adding, “Washington has been underwriting EVs for nearly 30 years.” Critics of EV tax credits include people who say the government shouldn’t be in the business of shaping buying decisions. Others — fewer each year — say climate change/global warming is a hoax. The foes got a boost this week with a Wall Street Journal lead editorial, “Subsidize My Electric Car, Please,” that claimed the tax credits mainly benefit the wealthy and that market forces should decide the fate of EVs. Separately, Senator John Barrasso (R-Wyoming) sent a letter to GOP senators urging them not to extend the EV tax credit.
Pro-EV credits people say the WSJ editorial made assertions that bear Snopes-style fact-checking, such as that “Washington has been underwriting EVs for nearly 30 years” and claiming it’s a “blatant income transfer for the well-to-do [of EVs, which have] a starting price of around $36,000.” Facts are slippery things. The feds have underwritten energy research (many kinds) for decades, but the first EV/PHEV credits weren’t until 2010. The average vehicle in 2018 sold for about $38,000 (per Kelly Blue Book), including options. Also, while four in five EVs sell to people with household incomes over $100,000 (in 2016), many were higher-priced Teslas like the Model S and X. Also, the majority of EV transactions are leases where it’s hard to determine income.
A more valuable piece of information would be to know the income of people acquiring mainstream EVs such as the Nissan Leaf, Volkswagen e-Golf, Chevrolet Bolt EV, and Hyundai Kona Electric.
If legislation does pass — and it is not currently being fast-tracked — it’s possible the backers might agree to a reduced or zero tax credit for costly EVs. If somebody buys or leases a Porsche Taycan EV — starting price $152,000 — it’s safe to say they are not in the mainstream of American wage-earners. Legislation also faces uncertain odds of being signed by the President. EV credits flow especially to staunch blue states such as California more than, say, West Virginia (the reddest state of the 2016 election). For tax credit backers, the long game may be waiting to see which way the nation votes in 2020. If the Senate, House, and President all go Democratic, the odds of a tax credit reinstatement are higher. The winning arguments may revolve around climate change issues and supporting new technologies.
For 2019, however, the No. 1 automotive/climate change discussion revolves around how much control California and a dozen other states have in setting their own pollution rules. For decades, California, because of its unique pollution issues especially in the Los Angeles basin, has had the choice of following federal air pollution regulations or setting its own. Thirteen other states have chosen to use California’s emissions rules: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Vermont, and Washington.
In July, four automakers cut a deal with California to adopt even tougher tailpipe emission rules. That effectively snubbed President Trump’s goal of a standards rollback.
Rules for the EV Tax Credit
The tax credit for an EV has several rules. They’re not hard to understand once you grasp it’s a credit on taxes you’d otherwise owe. It’s not a check, and it’s not always $7,500. To qualify for a tax credit:
- It must be an electrified vehicle with a battery of at least 4 kilowatt-hours capacity, which is another way of saying hybrids such as the Toyota Prius do not qualify. Also, it must be capable of being charged by an external electric source, meaning it can’t just be recharged by the combustion engine or brake regeneration. It can’t weigh more than 14,000 pounds gross vehicle weight (the latter not a problem for passenger cars or even the biggest SUVs or pickups).
- The full credit, $7,500, requires at least a 16 kWh battery. Cars with 4-16 kWh get partial credit. See the EPA fuel economy site for specific-car info.
- Traditional hybrids already had their own tax-credit program. It’s gone, it’s not likely to come back, and hybrids sometimes cost only $1,000 more than gasoline-only versions. That means there’s little need for a tax credit, since the buyer may well earn back the cost delta over a couple of years.
- It’s a tax credit, not a tax refund or other check from Uncle Sam. This is good because a tax credit is worth more than money back, on which you’d then typically owe taxes. But you have to owe taxes to get a tax credit and you have to owe taxes in the calendar year you bought the car. If you want a $7,500 credit, you need to owe $7,500 in taxes (over the course of the year, not the extra you might owe April 15.) It is not good if you don’t owe taxes, but then, most Americans would be happy to trade places with you assuming you’ve figured how to not pay taxes and still afford a new car.
- The tax credit accrues to whoever bought the car. If you leased the car, the credit goes to the leasing company (or whoever holds title) and you should see a $7,500 offset in the implied priced of the car. If you didn’t get it, find someplace else to lease.
- A dealer demo doesn’t count when you buy it almost-new, but the dealer should be figuring the credit into what it sells the car for. There is one credit per qualifying car, and it applies to the first purchaser.
- When an automaker reaches 200,000 cumulative sales (counting from January 2010), the tax credit phases out, gradually:
– The quarter that automaker hits 200,000 doesn’t count, nor does the quarter following. If an automaker hit 200,000 this month (September 2019), the third and four quarters would be full-tax-credit quarters.
– The following two quarters, the buyer is eligible for a half-credit, or up to $3,750.
– The next two quarters, it’s a one-quarter credit, or up to $1,875.
– Then the credit goes away (unless The Congress acts).