As lawmakers battle out an overhaul for the U.S. tax code, one bargaining chip may have huge ramifications to the automobile industry. Reports have surfaced that the U.S. government’s federal tax credit for electric vehicles may be on the chopping block, which could send sales of EV’s tumbling.
Right now, buyers of qualifying electric vehicles receive up to $7,500 per vehicle in the form of a tax credit through the Internal Revenue System (IRS). The tax benefit has supplied a noteworthy boost to sales of electric vehicles and has been seen by the industry as a necessary means of subsidizing the high cost associated with developing electrification technology.
According to Bloomberg, lawmakers are considering nixing this tax credit program under proposed new tax codes. A theme amongst the Republican-led effort to alter the U.S. tax code has been simplifying the grossly complex nature of U.S. taxes; killing off the electric car subsidy could best be described as a “simplification.”
The EV tax credit is not perpetual in its current form. Every automaker is capped to 200,000 copies of the $7,500 tax credit. This means that as manufacturers approach 200,000 in sales of qualifying vehicles, the risk of this credit being phased out is there without any statutory changes. Tesla is largely expected to be the first automaker to run out of credits, which could happen as soon as next year if the company meets new production targets for the Model 3 sedan.
General Motors and Nissan are both not far behind Tesla in hitting 200,000 sales.
Once an automaker hits their cap, the credits begin to dwindle in amount until ultimately reaching $0, at that point it is assumed the automaker has managed to scale electric vehicle costs enough to sell to an unsubsidized market.
Analysts predict removing the federal tax credit could have huge ramifications on sales of electric vehicles. A sudden drop in sales of EV’s could have cascading impacts on automakers, who cannot easily retool production to accommodate swift changes in demand.
Further complicating the situation is that all automakers have to sell a certain number of zero-emission vehicles (ZEV) to achieve their Corporate Average Fuel Economy (CAFE) targets. Failure to sell enough ZEV’s will increase the fines they must pay to the Environmental Protection Agency (EPA) and California Air Resources Board (CARB) for not achieving targets.
Of course, nothing with proposed tax changes is final at this time. Nonetheless, such dramatic statutory changes will clearly impact the automotive industry if enacted.