Controversial Tax Credit Provisions Could Delay The Long-Term Adaptation Of Electric
The Build Back Better Act passed the House of Representatives and is being reviewed by the Senate. One of the act’s goals is to promote electric vehicle (EV) sales. But some of the provisions are questionable and may delay its long-term goal of accelerating permanent adoption of EVs.
The bill provides a hefty tax incentive with some limitations.
- The federal tax credit will increase to $12,500. But the amount is reduced by $4,500 unless the EV purchased is assembled in the U.S. using union labor. The amount is also reduced by $500 if the car’s battery is not made in the United States.
- An EV is ineligible for the credit if the price is more than $55,000 for passenger cars and $80,000 for vans, SUVs, and trucks.
- Individuals reporting adjusted gross income of more than $250,000 or joint filers reporting more than $500,000 are ineligible for the credit.
- The elimination of the tax credit phase out after 200,000 cars are sold. Currently, after 200,000 of a certain make and model are sold, the tax credit is reduced by half for the following year and eventually the credit is eliminated. If passed, this will allow previously phased-out cars to be re-eligible for the tax credit.
- A $4,000 tax credit is available for the purchase of a used EV.
- After 2027, an EV must be made in the U.S. to be eligible for the tax credit.
Based on the above, the Tesla Model S and Model X will be ineligible for the tax credit because their price exceeds the $55,000 limit for cars and $80,000 limit for SUVS. The Tesla Model 3 and Model Y will likely qualify but will only be eligible for a tax credit of $8,000 if its battery is made in the United States. The credit is reduced by $4,500 because Tesla does not use union labor.
As of the date of publication, the only EVs that will qualify for the full $12,500 tax credit will be the Chevy Bolt because its battery is made in the U.S. and uses union labor to manufacture the car. The Ford Mustang Mach E will not be eligible for the full credit because it is manufactured in Mexico and China.
Putting a price maximum to qualify for the tax credit makes sense. Those who can afford a $130,000 Tesla Model S Plaid probably do not need a tax credit. It could incentivize the creation of low-cost EVs that will be eligible for tax credits.
But putting in an income limitation seems to make less sense, at least for now. Studies show that most EV buyers are high-income earners. While some of these people would have bought EVs without the tax credits, there are those who would not. The latter are likely to be those who see cars as nothing more than transportation and don’t splurge on unnecessary or luxury options.
Also, these people are likely to compare the cost benefit of owning an EV compared to a similar car with a traditional combustion engine. There are studies that show that EVs are not yet competitive with cars with combustion engines due to the high cost of batteries. When it comes to long-term savings, it will take several years before fuel savings will offset the higher price of an EV. A study in Singapore found that adoption in Singapore is both undesirable (due to higher social costs) and unlikely (due to higher private costs) in the immediate and near future. Because of the higher cost of the EV, some will not buy one unless the tax credit offsets the increased cost.
Finally, the most controversial provision in the bill is the $4,500 extra credit incentive for buying EVs using union labor. It is not surprising that union groups would favor this provision while companies that do not use union labor would be against it. However, it goes beyond that.
The Canadian and Mexican governments are lobbying against the provision arguing that it is protectionist, can harm all parties’ long-term EV objectives, and may even violate U.S. obligations under the USMCA trade deal. The provision could be challenged to the World Trade Organization. The European Union has also expressed similar concerns over the provisions arguing that they can harm U.S. workers employed by European auto manufacturers.
It can be argued that the $4,500 credit is not discriminatory since all auto manufacturers can be eligible so long their employees are unionized.
But putting politics aside, the economic question is whether the extra $4,500 credit will affect a consumer’s decision on which EV to buy. If price is the only factor, then yes it can create a difference. But others will look at a variety of factors when purchasing a car such as reliability, word of mouth, the cool factor, and its quirks and features. Considering everything, they will forgo the $4,500 extra credit if they prefer the nonunion-made car. Right now, no one knows what will happen, but there is a reason why Toyotas are slightly more expensive than the company’s rivals.
In the final analysis, while the Build Back Better Act’s EV tax credit provisions attempts to address wealth inequality and favor union labor, it may ultimately end up delaying the long-term objective of the mass-adaptation of electric vehicles. While those with high income are the majority of EV purchasers, some of them are still cost-conscious and placing limitations could drive them back to hybrid cars or gas guzzlers. Also, it is unclear whether an additional $4,500 credit will drive people to purchase union-made vehicles. But what is clear is that key trading partners of the U.S. do not like the protectionist provisions and may retaliate, which can result in more supply train issues and ultimately higher prices for the consumer. If the government is serious about switching away from internal combusting engines in the long term, it should provide incentives to get more people into EVs, rather than trying to meet some ambiguous goal of economic fairness. As more companies are entering the EV market, the resulting competition will result in convenience and lower prices for consumers.
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at email@example.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.