$7500 is a lot of money to take advantage of now, while it remains available. (carscoops.com)
Jesse Lorre
June of this year, the Treasury Department announced that the IRS had issued over $1 billion in advance-payment electric vehicle tax credits, subsidizing the cost of purchase for over 150,000 fossil-fuel-free cars across the country. This expenditure will save the American consumer, in aggregate, over $3.2 billion dollars in fuel and maintenance costs. Good deal for Americans and climate! By now, that number has probably doubled from what it was in June. These credits, originally enacted under the George W. Bush administration, were updated in the Inflation Reduction Act and were slated to continue until 2033. However, those credits are not likely to last under the incoming presidential administration and Republican congress. Let’s explore these credits, how we got here, and where we might go in 2025.
The first modern EV tax credits were established by the Energy Improvement and Extension Act of 2008. These credits were intended to subsidize the development of clean vehicle technology for auto manufacturers by giving purchasers tax credits on the first 200,000 vehicles that each manufacturer sold. Nissan hit the cap first with its 200,000th LEAF in 2015; General Motors and Tesla each reached that cap in 2018. As Ford, Hyundai, Kia, and others began developing EVs, purchasers were able to get tax credits on those vehicles, but purchasers were no longer able to get them on the electric cars made by manufacturers who had been first out of the gate.
This uneven playing field was leveled again in 2022 when Congress passed the Inflation Reduction Act (IRA), which updated the criteria for the credits to be issued as well as updating the manner in which the credits could be claimed. These updated criteria took into effect the new landscape for clean vehicles, now with many more players and an emerging global race for technological dominance in electrified transportation, as well as a desire by the Biden Administration to bring equity into the credit distribution calculus.
The IRA revived the new vehicle credits at $7,500, and introduced a Used Clean Vehicle Credit of 30% of the purchase price up to $4,000 with no limit on the number of units sold. They put in place income limits for eligibility ranging from $300,000 adjusted gross income for new vehicle purchases for married taxpayers filing jointly, down to $75,000 for individual filers purchasing a used EV or plug-in hybrid. The legislation also put in place restrictions on where the vehicle batteries could be made in order for the vehicle to qualify for the credit. These restrictions encouraged automakers to move battery manufacturing to the U.S. BMW, Ford, GM, Honda, Hyundai/Kia, Mercedes-Benz, and Nissan have all invested billions of dollars “re-shoring” battery manufacturing in the U.S. since the passage of the IRA. This investment, as well as the thousands of jobs it has created, are mostly in states that voted for Trump in the 2024 election.
However, electric vehicles have been a lightning rod for Republican attacks during the latest election cycle, with president-elect Trump leading the charge. Trump’s campaign-trail attacks on electric vehicles were especially pointed in Michigan, the heart of the American auto manufacturing industry, where he said, “Biden is a catastrophe for Michigan, and his environmental extremism is heartless and disloyal and horrible for the American worker.” He went on to say, “Electric cars will kill more than half of U.S. auto jobs and decimate the suppliers.” (Politco, 6/27/2024).
But the real issue that Trump and the Republicans are trying to address is the re-authorization of the 2017 Tax Cuts and Jobs Act (TCJA), which expires at the end of 2025. The deficit hawks in Congress are less likely to re-approve the TCJA if there are not corresponding cuts elsewhere, and the IRA EV tax credits are appetizing targets for repeal. The TCJA, in practice, is a regressive tax cut, giving the top 1% of earners a $70k annual tax cut, and middle-income households would see a $1,000 annual cut, according to an analysis by the Tax Policy Center. Meanwhile, the IRA EV credits are intentionally progressive, targeting low- and middle-income Americans, and incentivizing people to reduce their transportation costs with a vehicle that doesn’t require trips to the gas station.
The Inflation Reduction Act was passed by a slim democratic majority in Congress. Democrats used Reconciliation, a legislative procedure that allows a law to avoid the filibuster in the Senate and pass with a simple majority. Legislation only qualifies for approval through the Reconciliation process if it is part of budget negotiations, and if it helps to reduce federal deficit spending. And with the Republicans holding a slim majority in the House and Senate, they are likely to use reconciliation to pass an extension of the TCJA; in order to meet the deficit reduction requirements, they will most likely sacrifice the EV tax credits from the IRA.
The IRA was passed in August 2022, a month before the end of the federal fiscal year and applied to the following tax year. Any extension of the TCJA that repeals EV tax credits is unlikely to happen right away but would have to happen prior to October 1 to have an impact on tax year 2026. Moreover, any legislation that repealed the EV tax credits would be for tax year 2026, not retroactive to 2025. It is also extremely unlikely that Trump would be able to end the credit through executive action, such as by instructing the IRS not to pay the credits.
On the other hand, the tax credits have been very popular, and not just in blue states. After California, the two states with the most EV registrations in 2023 are Texas and Florida – both deeply red in the last election. Add in the thousands of jobs that have been created by the IRA battery factory incentives and the fact that the Auto Manufacturers and the United Auto Workers are asking Congress to keep the EV credits in order to maintain competitiveness with China, and there may be some electoral and legislative resistance to repeal. On the other side of that equation is Elon Musk, who made the EV popular in the first place; he wants to end the EV tax credits because Tesla is the only automaker that is currently profitable on their EV sales without government subsidies.
With all of this uncertainty, it may be difficult to know how best to proceed. The smart money is on EV tax credit repeal sometime in 2025, applicable to tax year 2026. So, if you have been considering reducing your carbon footprint with an electric vehicle, 2025 is the time to do it. Prices have never been so low for high-quality, low-mileage EVs. With $4,000 tax credits on used EVs and $7,500 tax credits on new EVs now available at point of sale, going electric with your transportation has never been easier.
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