tax credit

Last week, Republicans in the U.S. House of Representatives released their first attempt at tax reform legislation.  Buried in the proposed legislation is a repeal of the current tax credit of up to $7500 to purchasers of electrified vehicles that has subsidized early adopters of battery-electric and plug-in hybrid vehicles.  The repeal would affect new electric car sales beginning almost immediately, in January 2018.  Currently only 10 manufacturers offer vehicles that qualify for the full tax credit, although new offerings are coming out each year.

Under the current tax credit structure, the credit applies to the first 200,000 electric vehicles each manufacturer produces.  After the 200,000 cumulative sales mark, the credit begins to phase out.  During the first 6-months of the phase out period, purchasers may redeem 50% of the credit and 25% of the credit during the following 6 months, after which point the credit is no longer available for electric sales from that manufacturer.  However, the remaining manufacturers still preserve the ability to redeem tax credits for the first 200,000.

Currently Tesla and General Motors lead the pack in electric vehicle sales with approximately 150,000 and 159,000 cumulative sales, respectively.  Each of these companies leveraged the available tax credits to boost sales of costly early electric vehicles.  Meanwhile, battery costs have dropped by 80% over the past 6 years, rewards that the entire automotive industry may reap.  At the current sales progression, Tesla and General Motors were each expected to hit the phase out period in 2018.

While the proposed legislative repeal ends the incentive almost immediately, it would only accelerate the cutoff for the largest players by about 18 months.  Certainly consumers and therefore the remaining manufacturers would be hurt by the sudden cutoff of this incentive.  However, with battery production costs continuing to drop, the initial goal of the incentives to drive electric vehicle development has been realized, with manufacturers announcing whole upcoming electric vehicle lineups.

Even if the phase out of the federal tax credit raises electric vehicle prices in the short term, other incentives may make up for the repeal. For example, currently 45 states and DC have some sort of state-level incentive for electric vehicle purchases.  These incentives could be bolstered to make up for the loss in federal promotions.  Additional measures could be adopted from other countries.  Norway, for example, exempts electric vehicles from various taxes and registration fees, making electric vehicles often less expensive to purchase than comparable combustion engine vehicles.  In fact, these incentives may be even more profitable for manufacturers, with the world’s highest per capita demand for electric vehicles, with General Motors raising its price by $5000 for the Ampera E (sister to the Chevy Bolt).  Exempting electric vehicles from state sales taxes would also distribute the benefits of the refund to people lower on the income scale who may not otherwise have $7500 in tax liability to take full advantage of the credit.

While consumers and manufacturers first entering the electric vehicle are invariable hampered by potential repeal of the EV tax credit, in the medium-term, repeal should have little effect on the long-term global trend toward mass EV adoption.