According to recent news, current President-elect Donald Trump and his team are very likely to either greatly restrict or completely eliminate the current tax credit being offered on electric vehicles. Although there have been tax credits available to help encourage folks to buy EVs for many years now, the current version was put in place by President Joe Biden as part of his Inflation Reduction Act (IRA) of 2022. This law included a wide range of measures to try to stimulate the economy, and many of them involved promoting clean energy, which is where the big tax credit for drivers buying EVs comes into play. Now that there’s a lot of talk about Trump’s team eliminating this tax credit, the situation has become much more complicated for both auto manufacturers and car buyers alike.
What Is the Current Tax Credit?
To get a proper view of what’s currently going on, it helps to fully understand the ins and outs of the tax credit that’s available—it’s about more than just a lump sum. For starters, only certain vehicles qualify for the credit; they have to be battery-electric vehicles or plug-in hybrids, of course, but they also need to be assembled in North America and source a certain percentage of their battery components from close trade partners. This was done in an effort to boost domestic manufacturing and reduce the reliance on parts and minerals from other countries, notably China. As long as a new vehicle meets these requirements, a $7,500 tax credit is then available for the buyer (or lessee).
However, there is an important point that a lot of people don’t necessarily realize: it’s officially a tax credit, not a rebate or a refund. Buyers who meet the income cap requirements (which are designed to reward lower and middle-class drivers rather than the wealthy) only reduce their federal income tax liability for the year they buy an EV by the tax credit amount. So if someone owes $4,500 in taxes and qualifies for the full EV tax credit, that extra $3,000 would not be paid to them. However, the IRS has declared that it will not attempt to recapture any excess money claimed by buyers who have the full EV tax credit deducted at the point of sale. This is one of the details that could change under Trump.
Trump’s Potential Plans for the Tax Credit?
Based on what Reuters has reported, Trump’s team would ideally like to eliminate the EV tax credit completely. They’d prefer not to reduce it or restrict it; they want it gone. This is not much of a surprise considering the leader of Trump’s team regarding US energy policy is a billionaire who made his riches in the oil industry. I’ll let you use your imagination as to why an oilman would want to eliminate a tax credit that encourages people to buy EVs rather than a vehicle with a conventional internal combustion engine.
According to this same Reuters article, if they cannot kill the tax credit entirely, then they will likely settle for restricting it in any way possible. Since the tax credit is part of the IRA, which is federal law, it would take a bit of work to completely eliminate it, though that’s not impossible. If Trump’s team is unable to do that, then he could still use his executive powers to limit and restrict how the tax credit is available by having the IRS reinterpret details like the point of sale deduction or the leasing loophole (which allows dealers to claim an EV lease is a commercial sale and give drivers the full tax credit regardless of their income or where the EV was built). No matter what happens, it’s almost guaranteed that it will be more difficult to get the EV tax credit in the next year or two if it isn’t eliminated completely (which is also a strong possibility).
Who Supports and Opposes Ending the Credit?
As you might imagine, there is a fair amount of support for eliminating the current EV tax credit, as well as people who want to see it remain, though some of the players might surprise you. No surprise, of course, is that the oil industry is heavily in favor of reducing or getting rid of the tax credit since it does encourage people to go with an EV rather than a conventional vehicle. I doubt anyone is choosing a Chevy Blazer EV rather than the standard Blazer solely for the tax credit, but for a buyer on the fence between the two, it could be a deciding factor that pushes them toward the all-electric model.
What you might not expect is that Elon Musk is heavily in favor of eliminating the EV tax credit, even though it will likely harm Tesla, but only slightly. Tesla is the undisputed leader in the EV marketplace, while other brands like GM and Ford (and small startups like Rivian and Lucid) are doing their best to make headway in the EV market. In the third quarter of this year, just under half of all EVs sold were Tesla models, with the other brands making up the rest. But four years ago, Tesla sold more than 80% of all EVs; that shows the progress the other companies have been making.
Reducing demand for EVs would hurt Tesla a bit, but Tesla was already profitably selling EVs without tax credits before the IRA; it would likely do far more damage to the other companies, many of which are losing money on EVs even with the government subsidies, and Musk knows it. Furthermore, there’s no talk (that I’m aware of) about eliminating the Federal requirements for auto manufacturers to hit carbon efficiency numbers; many car companies achieve these numbers by purchasing carbon credits from Tesla. Tesla made $1.79 billion from selling carbon credits just last year, even though it had a 7% decrease year-over-year in its fourth quarter. These credits represent a massive source of revenue for Tesla, but they’re threatened by other companies making more EVs; if Tesla eliminates that competition while keeping the federal requirements that make the credits so lucrative, then getting rid of the EV tax credit is a win-win situation for Musk and his company.
Opposing the elimination of these tax credits are democrats who supported the IRA in the first place, along with the current US Energy Secretary and the United Auto Workers labor union. They’re concerned that eliminating the tax credit would hurt American car companies and result in lowered production as well as the loss of jobs. The tax credit has been instrumental in manufacturers like Ford and GM moving forward with big efforts in the EV market; getting rid of these credits could hamper these efforts. This would leave US companies falling behind foreign competitors, including EV developers in China—the largest auto market in the world—and could cause innovation in US engineering to stall or falter. So far, the Big Three US car companies have not commented on the potential elimination of the tax credit.
What Does This Mean for Car Buyers?
This year, 87% of drivers who bought an EV in the US took advantage of all or part of the EV tax credit, according to a study by J.D. Power. Their researchers also determined that 64% of people who bought or leased a luxury EV this year said the tax credits and other incentives were a big part of that decision; for non-luxury vehicles, 49% of buyers said the credit affected their decision to go electric. Anyone currently contemplating buying an EV should do so sooner rather than later since the tax incentive may very well disappear completely—or at least be harder to take advantage of. Effectively taking $7,500 off the cost of an EV is nothing to sneeze at and brings them closer to the price tag of similar, conventional models. Without that, widespread adoption of EVs will likely slow, which could impact a number of other things, such as the expansion of charging station networks across the US. I can’t predict the future, but eliminating the tax credit seems to harm car buyers without offering anything in return.
