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The Trump Administration Says Ending the EV Tax Credit Will Save Taxpayers $2.5 Billion, Automakers Want it Extended

The Trump Administration Says Ending the EV Tax Credit Will Save Taxpayers $2.5 Billion, Automakers Want it Extended

Author: Eric Walz   

The Trump administration's new budget proposal is seeking to eliminate the federal EV tax credit on the purchase of electric and hybrid vehicles in the U.S. Critics say the move will cause electric vehicles sales in to fall in the U.S, a senior U.S. Transportation Department official said on Tuesday.

The White House says the move to eliminate the federal EV tax credit will save taxpayers $2.5 billion over the next decade.

The latest Trump budget also would eliminate loans from the Energy Department that helped automakers develop more efficient vehicle technology such as batteries and hybrid systems, to improve fuel economy.

The Obama administration first approved the federal EV tax credit of up to $7,500 on the purchase of a qualifying electric vehicles in 2009. The tax credit was designed to encourage the adoption of electric and plug-in hybrids (PHEV) vehicles in the U.S. At the time, President Obama declared a goal of reaching 1 million plug-in vehicles for sold by 2015.  

The incentive was limited to qualifying electric and hybrid vehicles purchased after Jan 1, 2010.

Tesla Benefited from the Federal Tax Credit

When the tax credit took effect in 2010, Tesla was still a niche producer of fully-electric cars, but has grown since then. The automaker offered the Tesla Roadster to a handful of affluent buyers who could afford it. Tesla made just 500 Roadsters the first year, and all were pre sold before being made.

However by 2012, Tesla slowly grew to become a prominent global electric car manufacturer with the release of the Model S. On June 22, 2012, Tesla began deliveries of the electric sedan, one of the the world's first fully-electric luxury cars. The car was a hit with global consumers and as a result the company became a worldwide name.

Tesla managed to become one of the first new car companies to come along in nearly a 100 years to challenge the slow-moving auto industry, by building only battery-powered vehicles. However, the Model S was too expensive for many buyers.

A small part of Tesla success with the Model S sales in the U.S. can be attributed to the federal EV tax credit. Tesla advertised its Model S, and later the Model X and Model 3, with the $7,500 discount already factored in. Buyers in California were also able to take advantage of an additional state tax credit of up to $2,500. When combined together, Tesla buyers could receive a $10,000 tax break on the purchase of a Tesla vehicle.

Other states offer tax breaks on the purchase of EVs as well. Colorado offers tax credits up to $5,000, Massachusetts $2,500, New York up to $2,000 and Pennsylvania offers rebates up to $1,750. Although California remains the biggest market for EVs in the U.S.

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A Tesla Model S charges at one of the company's EV charging stations.

The EV Tax Credit Phases Out After Sales of 200,000 EV and Hybrid Vehicles

The tax credit begins to phase out after each automaker reaches sales of 200,000 qualifying vehicles. Once this number is reached, the credit is cut in half to $3,750 beginning in the second calendar quarter after (six months). In the fourth calendar quarter it is halved again to $1,875, before expiring in the sixth calendar quarter after reaching the sales limit.

Tesla reached that number in July 2018 and as a result, the $7,500 tax break for buyers was halved to $3,750 beginning on Jan 1, 2019. For General Motors, the credit gets cut in half beginning April 1.

Facing shrinking demand, automakers including Tesla and General Motors have pushed for the extension of the 200,000 vehicle cap. So far, the two automakers are the only ones that exceeded the 200,000 vehicle limit.

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Buyers of the 2019 Chevy Bolt EV no longer qualify for the full $7,500 federal EV tax credit.

According to data published by InsideEVs, as of Nov 2018 Nissan sold the third highest number of qualifying vehicles with sales of 127,875.

"As you take away some of these incentives, demand will likely come down a bit," Derek Kan, the Transportation Department's under secretary of transportation for policy and a former Lyft Inc executive, said at the CERAWeek energy conference in Houston. "When you take away a tax credit, we know from basic economics demand will likely fall because the price is a little high."

For Tesla, the credit is expiring just as the company is hitting and maintaining its production goals for the Model 3 electric sedan, the company's first mass-market electric car. Tesla is building about 5,800 Model 3's per week, according to Bloomberg's Tesla tracker, which tracks Model 3 sales using vehicle registration data. The automaker faces the possibility of shrinking demand as the tax credit is being phased out.

The Model 3 became the top selling premium car in the U.S in 2018.

Lobbying Efforts by Automakers to Raise the 200,000 Vehicle Cap

In Nov 2018, Tesla teamed up with Nissan and General Motors on a lobbying initiative to extend the 200,000 vehicle cap. The lobbying efforts led to legislation being introduced in both chambers of Congress.

However, opponents of the program have spoken up against it saying it disproportionately helps wealthy car buyers. Instead house republicans want the funds to go towards improving roads and other infrastructure and not to buyers of EVs.

"Rural America's taxpayers shouldn't be footing the bill for others to drive high-end electric vehicles," said Rep. Jason Smith, R-Mo., said in a statement. "The Electric Vehicle Tax Credit has benefited the wealthy at the expense of everyday Americans just trying to get by. It's time to end this wasteful subsidy and help rebuild our nation's infrastructure by ensuring every driver contributes to improving the roads we all use."

For Tesla, the expiring tax credit has more consequences, as global automakers following Tesla's lead are beginning to introduce their own fully-electric models. These models will compete directly with Tesla's vehicles and have a lower price tag.

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The fully-electric Audi e-tron will go on sale in the U.S. later this year.

Among the highly anticipated models being released this year is the fully-electric Audi e-tron SUV. Buyers of the e-tron still qualify for the full $7,500 tax credit, as well as any local state incentives.

The Audi e-tron starts at $74,800, while the Tesla Model X SUV starts at $82,000. However, Tesla is raising prices next week. The automaker is raising the price of the Model X and Model S models by around 3 percent next week, as the automaker looks to cut costs associated with the production of the mass-market Model 3. Furthermore, The threat of higher import tariffs may impact Tesla's sales in China, an important market for the automaker and the world's biggest market for electric vehicles.

Tesla finally opened orders for the long awaited $35,000 Model 3 this month after the tax credit was cut in half. Buyers of the $35,000 version of the Model 3 can take advantage of a $3,750 federal tax credit until it is cut in half again on July 1.

It's not just Tesla that that faces slowing EV and plug-in hybrid sales. If the White House eliminates the federal EV tax incentive, buyers of all EV brands will pay a little more.

Eric Walz
Eric Walz
Originally from New Jersey, Eric is an automotive and technology reporter specializing in the high-tech industry in Silicon Valley. Eric has over fifteen years of automotive experience and a B.A. in computer science. These skills, combined with technical writing and news reporting, allows him to fully understand and identify new and innovative technologies in the automotive industry and beyond. He has worked on self-driving cars and as a technical writer, helping people to understand and work with technology. Outside of work, Eric likes to travel to new places, play guitar, and explore the outdoors.
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