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Electric Vehicles: What Will Happen If the Tax Credit Is Eliminated?

Electric vehicle (EV) sales could suffer a setback if some lawmakers have their way. One cost-cutting measure on the table in the quest for some sort of tax reduction or reform is the $7,500 federal EV tax credit, in which case, individuals buying an EV would no longer qualify for that 1-time credit on their federal income tax return.

If the federal tax credit for electric vehicles is eliminated, supporters of electric cars argue that it’ll translate into reduced demand and plummeting sales. They may have a point.

Tax Credit Details

Nothing is simple when it comes to the federal government and its tax code. But, basically, the Internal Revenue Service (IRS) currently provides a 1-time tax credit of $2,500 to $7,500 to purchasers of vehicles using plug-in electric power for some or all of their propulsion. The size of the credit is relative to the size of the vehicle, its battery capacity and the percentage of its power derived from electricity. Whether fully electric or electric-gasoline hybrids, only vehicles charging their batteries by plugging into their electric source (a charging station of some type) qualify.

For example, the 2017 Hyundai Sonata plug-in hybrid qualifies for a $4,919 federal tax credit, while the 2017 Hyundai Ioniq EV qualifies for the full $7,500 credit.

Claiming the credit requires owners to fill out a special form on their federal income tax return.

Shelf Life

Never structured to go on indefinitely, the federal tax credit basically only applies to a carmaker’s first 200,000 qualifying vehicles. If a carmaker has one vehicle qualifying for the credit, it would apply to the first 200,000 units of that model sold. If a carmaker has three qualifying vehicles, when the total sales of all three vehicles combined reaches 200,000, the credit would no longer be available for any of the three or any future EV model from the same automaker.

Some Evidence

According to Politifact Georgia, at one time that state offered the most generous state tax credit ($5,000) for EVs. In early 2015, the Georgia General Assembly voted to not only eliminate that tax credit, but at the same time imposed an annual $200 registration fee on some plug-in hybrids and all fully electric vehicles to offset lost gasoline tax revenue. Both changes took effect on July 1, 2015. EV registrations dropped nearly 90 percent from 1,338 in June before the changes took effect to 148 registrations in August, Politifact reported.

What it means to you: No question, the EV tax credit is a subsidy to coax consumers into buying electric vehicles. It incentivises carmakers to invest in developing EVs by essentially providing marketing support to reduce the upfront purchase price of EVs without getting into the wallets of carmakers. Additionally, it creates more demand among consumers by creating what is ultimately an artificially lower price. There’s no way to actually predict what effect eliminating the federal tax credit will ultimately have on EV sales, but common sense and Georgia’s experience hints that sales will fall.

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