A Bigger Tax Credit For Going Electric: What It Could Mean For Consumers

About that $12,500 tax credit for the purchase of electric vehicles that’s been making news? Don’t hold your breath.

The revisions to the present federal income tax rebate for purchasers of qualified plug-in hybrid and electric vehicles are contained in Senate Bill 1298, the Clean Energy for America Act. It covers a slew of energy related issues, not just EV credits.

Because it provides billions of dollars in tax credits and rebates and is generally seen to promote a shift away from fossil fuels and to boost labor unions in the automotive industry, the measure is likely to be opposed by most Senate Republicans and perhaps a few oil-state Democrats, although none have come out against it so far.

The bill made it out of the Senate Finance Committee in May on a strict party-line vote: 14 Democrats on the committee favored it and 14 Republicans were opposed. Under Senate rules, tie votes are sufficient to get a bill out of committee and into the full Senate for a vote.

Not for Everyone

While it would substantially boost the maximum available federal tax credit for EV and plug-in hybrid purchasers, the Clean Energy measure won’t provide the maximum benefit to every buyer—and it would slap a first-ever price cap on the vehicles that are eligible for the credit.

Under the cap, only vehicles with manufacturer suggested retail prices of under $80,000 would qualify. That eliminates several Tesla models, most of the GMC Hummer lineup and top-end EVs from manufacturers such as Audi, Bentley, Jaguar, Mercedes-Benz, Porsche, Lucid Motors and Bollinger Motors.

Additionally, most EVs and plug-in hybrids would qualify only for the base $7,500 tax credit—same as available today—because the measure reserves the first $2,500 bump, to $10,000, for qualified plug-in vehicles made in the U.S. and the next bump, to $12,500, for those made in the U.S. with union labor.

Vehicles such as Ford’s hot-selling Mustang Mach-E wouldn’t qualify for either of the two tax credit bumps; the electric Mustang is made in a union plant in North America, but it is in Hermosillo, Mexico. General Motors also has said that it plans to build EVs in Mexico, which would limit their eligibility to the base $7,500 credit.

Restricting the full $12,500 credit only to union-built vehicles from plants in the U.S. is likely to draw Republican opposition but could also lose the measure support from some Democrats representing southern states with non-union auto assembly plants and a history of antipathy toward labor unions.

For consumers, it means that that only plug-ins built by Ford, General Motors and Stelllantis (the former Fiat Chrysler) at their plants in the U.S. would qualify for the highest amounts.

No EV or PHEV from BMW, Honda, Hyundai, Kia, Mercedes-Benz, Mitsubishi, Nissan, Subaru, Toyota or Volkswagen would qualify for more than a $10,000 credit—and most would be eligible only for the $7,500 credit.

Each of those automakers has plants in the U.S., but none are unionized and only a few build or are slated to build electric vehicles: Nissan builds the Leaf EV in Tennessee and Mercedes-Benz, Volkswagen and Volvo have said they intend to build electric vehicles in their factories in Alabama, Tennessee and South Carolina, respectively.

Nor are the assembly plants of any U.S.-based EV startups unionized. That list includes Canoo, Rivian, Bollinger Motors, Faraday Future, Fisker, Lordstown Motors and Lucid Motors.

Roadblocks

Even the base $7,500 tax credit seems to be coming under fire from some, although it has survived unchallenged since 2008. Several Republican senators have recently said they believe most EV tax credits now go to well-to-do car buyers who don’t really need them.

That criticism is supported by several studies of EV-buyer incomes, but fails to consider that, to date, many EVs have been luxury or high-performance models with correspondingly high price tags. EVs for middle- and lower-income buyers are just now starting to show up on automakers’ future products lists.

Sen. Lindsay Graham, R-S.C., also has argued that with many automakers voluntarily announcing shifts to EV production over the next decade, tax credits and other federal incentives aren’t needed because “it’s just a matter of time until most cars…will be running on something other than gasoline.”

More than Tax Credits

The bill’s transportation section does more than boost the tax credit many plug-in vehicle purchasers can claim.

It would end the current vehicle sales cap that has cost Tesla and General Motors their eligibility and is about to end Nissan’s eligibility as well.

Presently, an automaker’s EVs and plug-in hybrids are no longer eligible once that manufacturer has sold 200,000 qualified vehicles in the U.S. 

Under the new measure, eligibility wouldn’t end until the year in which 50% of all new vehicles sold in the U.S. were qualified EVs and plug-in hybrids. That’s expected to take a decade or more. And then there would be a three-year phase out.

The full rebate still would be available in the first year after the sales cap was reached, a 75% credit would be available in the second year and a 50% credit would apply in the third year, with no tax credit availability after that.

The congressional Budget Office has estimated the cost of the EV rebate proposal at $31.6 billion over the next 10 years. That’s a small part of the estimated $259 billion cost of the entire Clean Energy plan.

What it Means for Consumers

The big news for EV shoppers may not be the tax credit increases but that the measure turns the credit into a refund for eligible vehicles purchased as of Jan. 1, 2022.

That means that if an EV buyer qualified for the entire $12,500 credit, for instance, but only owed $8,000 in taxes for the year, the IRS would send a refund check for the $4,500 difference. 

Under the present rules, the credit can zero out a buyer’s tax bill for the year in which the vehicle was purchased, but the U.S. won’t send a rebate check for the difference. An EV buyer with a tax bill of $5,000, for instance, would only be able to claim a $5,000 credit.

Many EV advocates believe the credit should be converted to a direct rebate that could be used immediately as part of a down payment, lowering the initial cost of getting into an EV or PHEV.  It’s unclear if there is any sentiment in the Senate to make that change.

One key restriction the new measure wouldn’t change is limiting participation to buyers. The bill keeps intact language that makes only the original registered owner eligible for the tax credit. Consumers who lease and hope to partake of the federal incentive must find a leasing agency willing to share some of the credit.

When vehicles are leased, the owner is usually the leasing agency—often an arm of the vehicle manufacturer. In practice, many lessors apply all or part of the credit to help lower the cost of the EV lease, but that’s not required.

The measure not only imposes an $80,000 price cap on the retail cost of qualifying vehicles, it limits the total that any buyer can claim to 30% of the value of the vehicle. For a new EV or plug-in hybrid with a $30,000 sticker price, for instance, the maximum tax credit would be $9,000 even if the vehicle were built by union members in a factory in the U.S.

To qualify for the full $7,500 tax credit and any incremental boosts, a plug-in electric vehicle needs a rechargeable battery with at least 16 kilowatt-hours capacity. Minimum eligibility—for a $2,917 tax credit—requires a 5-kWh battery, and the amount increases by $417 for every kilowatt-hour of capacity past that, up to 16 kWh and beyond. Those rules remain unchanged in the new measure.

Fuel Cells and EV Chargers, Too

Left unchanged in the new bill are the $8,000 federal tax credit for purchasers of fuel-cell electric vehicles, also called hydrogen fuel-cell vehicles, and the credit for home EV charging equipment, which remains at 30% of the cost of purchasing and installing a home charger, up to a maximum of $1,000. 

For commercial charging stations, the bill boosts the maximum credit to $200,000, up from $30,000.

The fuel cell vehicle credit was due to expire at the end of this year. The Clean Energy measure would extend it under the same rules as the EV credit—until half of all new light vehicle sales in the U.S. are qualified plug-in or fuel cell vehicles, with a three-year phase-out after hitting that goal.

Long Way to Go

A Senate vote on the Clean Energy measure is unlikely until late summer or even into the fall—after Senate Democrats decide whether to consolidate it into President Biden’s American Jobs plan and to try to bypass filibuster rules so it would need only 51 votes instead of 60.

The measure also would have to be approved by the House, where Democrats have a thin majority and passage isn’t seen as much of an issue if it can get out of the Senate.

There are 50 GOP Senators and 50 Democrats—with Vice President Kamala Harris, a Democrat, voting only to break a tie—so passage in the upper house is no sure thing. To date, only half of the Senate Democrats and no Republicans have signed on as co-sponsors of the measure. The principal sponsors are Senators Ron Wyden of Oregon and Debbie Stabinow of Michigan.

Right now, supporters in Congress are marshalling forces and beginning the process of figuring out what changes are going to be needed to make it palatable enough to win Senate passage. The EV tax credits portion isn’t the most critical piece of the measure, but it is important and likely will face considerable scrutiny.

Although there’s “excitement” in Congress about a measure that would help create jobs, improve infrastructure and boost electric vehicle acceptance, “there are still a lot of hurdles to clear,” said Jonna Hamilton, director of the Union of Concerned Scientists’ Clean Transportation Program.

Right now, “every week has a different feel” regarding the measure’s chance of passage, she said.