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What you need to know about federal tax incentives for EVs

At the start of February, House Democrats introduced a new version of the GREEN Act which aims to revise the federal tax incentives for electric vehicle purchase, among other tax code revisions. If approved, the 2021 GREEN Act will open Tesla and GM to federal EV tax credits again. 

Currently, qualifying electric vehicles are eligible for up to a $7,500 tax credit, but those credits dry out if a car manufacturer sells 200,000 EVs, a cap that Tesla and GM passed in 2019 and 2020, respectively, which resulted in less credits being offered overall. Rep. Mike Thompson (D-CA) and every other Democratic leader on the US House Ways and Means Subcommittee on Select Revenue signed onto the new bill, which would reduce the max amount that EVs are eligible for to $7,000 and raise the sales cap to 600,000. Now, proponents have to wait and see if the Democratic-controlled Senate and Biden administration will back up the new bill. 

Not unlike its predecessor, the amount offered as a rebate with the 2021 version of the GREEN Act depends on the EV’s energy storage capacity, which means plug-in hybrids usually qualify for less. When an automaker reaches the 600,000 cap on vehicles sold, the new phaseout period involves reducing the credit by 50% for a single quarter before the government eliminates them. But on the plus side for automakers like Tesla and GM, the government gives them a free pass on any vehicle sold between the time they passed the 200,000 cap and the time President Biden hopefully signs the bill. 

Used car buyers also get a boost with this new act with the ability to claim up to $2,500 when buying a pre-owned EV that’s at least two years old and $25,000 or less. Companies and municipalities looking to buy heavy-duty EVs, like zero-emissions buses, can get a tax break of up to 20% of sales prices over $100,000. 

Does the GREEN Act only benefit the wealthy?

Yes and no…

Some critics of the bill in the past have called it out as a tax scheme that only benefits the wealthy who could probably afford to buy an EV at its full price without the tax incentive. The federal rebate also notably doesn’t limit who is eligible based on income. 

It’s easy to see why someone might think the GREEN Act predominantly benefits the wealthy, or at least the upper-middle class. The way it works is that if the federal credit offers “up to” $7,000 as a flat tax credit, it’s only worth that amount to someone whose tax bill at the end of the year is $7,000 or more, so you’d need to be making about $75,000 per year in salary or more to get the full benefit. Let’s say you’re in the $50,000 to $75,000 range and your bill comes to $5,000. Then that’s all the tax credit you’ll get back. And no, the remaining $2,000 won’t roll over into the next year’s taxes.

If you’re leasing the EV, this tax credit goes to the car manufacturer, not you. And it’s more likely that someone in low to middle income brackets will lease a new car rather than buy a new car, which is increasingly unaffordable

That said, the new provision for used EVs might help balance out the scales a bit. But for many lawmakers, quibbling over which income bracket benefits the most isn’t top priority right now. Under Biden’s proposal for net-zero US emissions by 2050, the EV passenger sales would have to hit at least 25% by 2026, according to a Bloomberg NEF report. 

Currently EV sales make up about 2% of market share. Limiting eligibility for the federal rebate might ease minds about it benefiting the rich, but “we want as many electric vehicles as we can get,” said Rep. Dan Kildee (D-MI). “Anything that incentivizes purchasing more vehicles ultimately has the effect of supporting lower cost vehicles.”

And indeed if the wealthy follow a trend around buying EVs, car manufacturers will lead the way with newer, better, and eventually cheaper EVs. And the powers that be in the market are already shifting with automakers like Hyundai, GM, and Ford announcing plans to expand EV platforms, and GM specifically aspiring to have only electric cars by 2035 and carbon neutral by 2040.

Rebates undeniably drive sales. California buyers accounted for nearly half of all new EV registrations last year. A California Air Resources Board report found that both state and federal tax incentives helped consumers make the choice to buy electric to smooth out the typically higher upfront cost. The report found that about “half of the participants considered the rebate extremely important in making their electric vehicle purchase a possibility and they would not have purchased or leased their EV without the rebate.”

Slow state adoption of EV policy will make achieving Biden’s climate goals difficult

The American Council for an Energy-Efficient Economy recently published a novel report ranking states on their steps to reduce barriers to EV entry. California, which ranks highest in the report, can serve as a model for what’s possible if a state were to really commit to policy that incentivizes residents and businesses to use and charge EVs. The Golden State offers purchasing incentives on top of the federal rebate, more charging options, and lower electricity rates at preferred car-charging times. The state rebates are capped based on income levels, and low-income drivers can get help replacing older ICE cars with zero or near-zero emissions vehicles. California also plans to deploy chargers in low-income communities with a history of environmental injustice, and it’s the only state that’s set deadlines for electrifying transit buses, heavy trucks, and commercial vehicles. 

Cali scored 91 out of 100 points in the report, with New York, Washington, D.C., Maryland, Massachusetts, Washington, Vermont, Colorado, Oregon, and New Jersey following not too far behind. 20 states, however, earned 15 points or fewer, which demonstrates just how far the local level needs to go in order to get on board with the federal agenda. 

“The leading states are embracing this transition, but many more are just starting, even as the automakers are preparing a burst of new electric models,” Bryan Howard, state policy director at the American Council for an Energy-Efficient Economy, told MarketWatch.

Written by Rebecca Bellan
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