EV Tax Credit in Jeopardy



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Sunday November 12, 2017 EV Tax Credit in Jeopardy Last week the Senate released their version of legislation aimed at revamping the tax code and like the version put forward by Congress it provides large tax cuts to corporations and the wealthy while taking away many tax deductions, one of which will be the Federal tax credits on the sale of electric cars. 


The idea behind the current tax credit is to offset the increased cost of electric cars over ICE vehicles so that the manufacturers can scale up to the point where they can reach price parity.  This is done to promote the new technology that is beneficial to society until it reaches widen enough acceptance that it no longer needs help.


The current tax credit varies from $2,500 to $7,500 and is basically set depending on the size of the battery pack.  All BEVs currently in production earn the full $7,500 but most plug-in hybrids get lesser amounts.  This tax credit it applicable to the first 200,000 vehicles sold in the USA by each manufacturer.  So far no manufacturer has reached this level of sales but some are coming close.  Tesla for example have sold about 170,000 cars and should hit the 200,000 mark by the end of the 1st quarter of 2018.  GM is also likely to hit 200,000 by the end of next year.


The whole idea of tax reform is supposed to be to spur industry but the Republicans have show that they are really interested in supporting old dying industries.  While the paltry sums being spent on EV tax credits are being cut, something that will have almost negligible affect on the growth in the deficit that is sure to result from the proposed tax legislation, billions in tax breaks for for the fossil fuel industry are not being touched.


Strategically this is a very poor decision as it will place the US Automobile industry at a huge disadvantage, effectively handing the industry over to the Chinese, who are pushing electric cars like crazy, while here in the US the government tries to keep the old school technology going even though we know that ICE cars are bad for our health and the health of our planet.


It wasn't totally unexpected that the republicans would try and end the EV tax credit, it is surprising that it lasted so long.  I really expected that the tax credit would have been one of the early targets for the Trump  administration as they waged war against the idea that we humans were the primary cause of climate change. 


We are currently at a critical point in the adoption of electric cars.  Most automakers have come to the conclusion that the future is going to be electric cars.  There are a few hold-outs, mostly Fiat-Chrysler and Mazda, although both are reluctantly working on vehicle electrification.  Honda and Toyota do see electric vehicles as the future but believe that hydrogen will be the power source and so are actively investing in fuel cell technology but are also working on battery electric technology too. 
In the end I think the elimination of the tax credit may have a huge impact on electric car sales in the US as electric cars loose their competitiveness.  The brunt of this is going to be born by the traditional carmakers.  The largest impact will be on GM and Nissan as the loss of the tax credit will make the leaf, bolt, and Volt much less price competitive with ICE vehicles in their class.  Plug-in hybrids like the Ford Fusion Energi are going to be less impacted by the loss of the tax credit since the amount of the credit is much smaller with these cars.

Tesla is the car company that is hardest to call.  Most people who put down deposits for the Model 3 knew in advance that Tesla would reach  200,000 car sales long before their car would roll off the production line in Fremont, CA.  Even with  this knowledge they went ahead and placed an order anyway.  I suspect that most will continue with their purchase just because they want a Tesla.  I think we will see something similar with the Model S and Model X.  These are cars in the luxury segment of the market where price is a much lower factor in purchase decisions.  The only sad thing is that Tesla has been unable to ramp up Model 3 production as it predicted so thousands of people who should have been able to get the tax credit will miss out if it gets dropped.


The loss of the tax credit is going to impact foreign car companies much less than it does the domestic car industry.  While the US takes away incentives to move toward electric based transportation systems the same cannot be said for other parts of the world.  Europe and Japan is still going to be providing incentives for plug-in cars so companies like Nissan, BMW, and VW , who sell most of their plug-in cars outside the US, are still going to be able to reach the sort of volume needed to drive prices down.  The same can be said of the booming EV market in China.  If the US is not careful plug-in cars from Chinese companies like BYD and Cherry could end up taking huge chunks of market share from GM, Ford, and Chrysler.


The Automobile companies also have to deal with things like the California Zero Emissions Vehicle mandate where they have to sell a certain number of cars each year in the California or the 12 other states and Washington DC that follow California emissions rules.  That's one of the reasons why the Alliance of Automobile Manufacturers is also lobbying to keep the tax credit.


If the republicans are successful in passing their tax bill this year then I expect to see a large jump in people buying cars in December so they can take advantage of the tax credit.  This will cause inventory on dealer lots to be depleted so sales in January will more than likely be low and people shouldn't read too much into that.  March 2018 sales are actually going to be a better measure of the impact of the tax credit.  In March 2017 a total of 13,857 plug-in cars were sold.  It will be interesting to see how well this tracks in 2018 ignoring sales of the Model 3, which should be just starting to ramp up volume by March but were not available in March 2017. 


How can you help?  If you agree with me that the tax credit is still needed to help the US carmakers maintain technological parity with carmakers around the world, contact your representatives in Congress and the Senate and let them know that the elimination of the tax credit is a bad idea if they truly want to maintain the long term health of the automobile industry in the US.


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