Published on November 14th, 2017 | by Loren McDonald0
7 Potential Revisions To Federal EV Tax Credit
November 14th, 2017 by Loren McDonald
Kill it? Save it? Why not improve it?
Electric vehicle advocates caught a glimmer of hope in the US last week when it was reported on November 9 that the Senate version of a revised tax plan would keep the federal EV tax credit intact.
The House of Representatives tax plan released previously, however, would end the federal EV tax credit. So, it is now anyone’s guess what the final version of the tax plan will look like and if the tax credit will be saved or eliminated.
With the EV tax credit potentially in jeopardy after nearly 8 years in existence, the core question on the table seems to be rather binary: Do we kill it or save it?
Why not instead look at this as an opportunity to actually improve the EV tax credit?
If each of the House and Senate plans are approved with their respective kill/keep status of the EV tax credit, a special conference committee of members from both the Senate and the House would work together to come to consensus about the different provisions in their bills. If this happens, it could open up the opportunity to negotiate for changes and improvements in the current tax credit.
7 Potential Revisions to the Federal EV Tax Credit
Understanding the current political and market environment in the US and Washington, D.C., some goals of a revised tax credit legislation might include:
- Expand the credit to all vehicle types to spur innovation and reduce the “picking winners” concern among detractors.
- Establish income and vehicle price point limits to ensure the credits primarily benefit lower and middle income households.
- Alter phaseout of the credit so that going forward all automakers are on even playing field.
- Increase US automaker competitiveness and job growth.
- Create a sense of urgency and drive consumers to purchase EVs and other alternative fuel vehicles sooner rather than later.
With the above goals in mind, the following are 7 ideas to improve the current tax credit:
1. Make the credit for any vehicle type that meets a specific fuel efficiency threshold. Expand the tax credit to apply to any vehicle propulsion type (gas, diesel, hybrid, fuel cell, BEV, or PHEV) that is able to achieve a certain level of gas mileage or gas mileage equivalency. The current tax credit applies only to pure battery electric vehicles (BEVs) and plug-in hybrids (PHEVs).
Minimum thresholds, for example, could be:
◊ BEVs/PHEVs: Minimum of 75 MPGe. This threshold would make the credit available to virtually all EVs currently available in the US.
◊ Fuel cell vehicles: Fuel economy minimum of 45 kilograms per mile (combined city/highway). This would make the credit available for the 3 FCVs currently available in the US (Honda Clarity FCV, Toyota Mirai, and Hyundai Tucson FCV).
◊ Gas/Diesel/Regular Hybrids: Set an aggressive minimum threshold of perhaps 50 MPG that currently is met by only two vehicles (Prius, Prius C), but in essence serves as a motivation for further hybrid innovation. While it would add complexity, with the continued popularity of SUVs and pickups, a lower but still stretch target of say a combined 40 MPG for light trucks could be considered.
Why/Benefit: Expanding the credit to all propulsion types reduces the “picking winners” view among many politicians, increases consumer choice, and encourages all types of innovation. The reality of course is that most auto manufacturers have recognized that battery-powered electric vehicles are the future, but this change provides the same tax credit benefit to fuel-cell vehicles, hybrids, and advanced ICE innovations.
2. Set a minimum threshold percentage of a vehicle being made in the US. Require that a vehicle must either be assembled in the US or that 50% (or similar appropriate percentage) of its parts are manufactured in the US.
Why/Benefits: Some of the goals of an alternative fuel tax credit should be to spur job growth and increase competitiveness and innovation from US-based automakers.
Several foreign automakers — including Hyundai, Kia, Nissan, Honda, Toyota, BMW and Volkswagen — have set up manufacturing plants in the United States. In August, Toyota and Mazda announced a joint venture to jointly develop electric vehicles and build a $1.6 billion plant in the US. While a US manufacturing-centric component to the tax credit likely wouldn’t have an immediate impact, it could encourage foreign automakers to build EV models in existing US factories.
A manufacturing percentage threshold could also encourage US automakers to set up battery pack and drivetrain factories in the US rather than relying on them being produced overseas. The challenge with this of course is that it can take 3–4 years for such a factory to be up and running and producing at scale. This would mean that these factories might only produce a benefit for domestic automakers for the final few years of a revised tax credit.
Anything that encourages American auto companies to invest and innovate more quickly in EVs and other alternative fuel technologies helps to ensure they remain competitive in the coming decades.
3. Cap the vehicle purchase price. The EV tax credit could have a cap based on the average or median sales price of light vehicles plus the $7,500 (or revised amount, such as $5,000). According to Kelley Blue Book, the estimated average transaction price (ATP) for light vehicles in the United States was $34,968 in January 2017.
Why/Benefit: Imposing a cap would help minimize the view by opponents of the credit that it is just for wealthy buyers of Teslas and other higher-end EVs.
4. Cap Adjusted Gross Income (AGI). Put a cap on adjusted gross income (AGI) at some appropriate level. For comparison, California has implemented income thresholds for its clean vehicle rebate program of $150,000 for single filers, $204,000 for head-of-household filers, and $300,000 for joint filers.
Why/Benefit: Adding an income cap reduces or eliminates one of the key attacks on the credit, that it mostly benefits the rich.
5. Lower the credit to $5,000 across the board. Lower the top credit amount of $7,500 to $5,000 and eliminate the multiple levels of credit amounts that begin at $2,500 based on the capacity of the battery. The single $5,000 credit would apply equally to any vehicle that met a minimum MPG or equivalency threshold.
Why/Benefit: Lowering the top credit amount from $7,500 to $5,000 reflects the market reality that cost disparity is getting smaller between alternative fuel vehicles and comparable internal combustion engine powered vehicles. Secondly, the credit has been available for nearly 8 years and it makes sense economically for a slight reduction in the credit amount. Thirdly, it puts all vehicle types on a level playing field and eliminates another complaint about the government choosing and favoring specific types of vehicle propulsion.
6. Phase out the credit expiration across the market, not individual manufacturers. Currently, the tax credit does not have an overall expiration date, but rather phases out over 5 quarters following the calendar quarter in which an individual manufacturer sells 200,000 EVs within the US.
A revised tax credit could be reduced each year by $1,000 till it reaches zero. A $1,000 step down each year could roughly parallel the annual decline in vehicle costs that results from technology advances and scaling manufacturing production. A declining tax credit might look something like this:
- 2018: $5000
- 2019: $4000
- 2020: $3000
- 2021: $2000
- 2022: $1000
- 2023: $0/expires
Why/Benefit: Revising the expiration to be an overall phaseout in the credit amount motivates interested consumers to purchase sooner because of the higher credit amounts. It also puts all manufacturers back on a level playing field.
Under the current tax credit rules, the first manufacturers to reach the 200,000 EV sales milestone will be Tesla, General Motors, Ford, and Nissan. This means that going forward, mostly non-US automakers would have a significant competitive price advantage over domestic-brand electric vehicles.
7. Make the tax credit refundable and available to all taxpayers. Allow all taxpayers to receive the full amount of the tax credit (including refunds) regardless of tax liability and whether they have leased or purchased the vehicle.
Why/Benefits: The current tax credit is only fully available to taxpayers who have a tax liability equal to the credit amount, such as $7,500 for most BEV models. If your tax liability is lower than the amount of your applicable credit, however, you only receive the credit up to the amount of your liability. This means that the credit is not available for many lower and middle-income households.
Chart source: MotleyFool
According to an analysis from MotleyFool, 35% of US taxpayers had “no taxable income whatsoever or had taxable income, but didn’t end up owing any income tax due to credits, deductions, and other adjustments.”
Secondly, the tax credit is only available if a taxpayer purchases the vehicle via a loan or cash. If a buyer chooses to lease the EV (roughly 75% of EV consumers, according to Edmunds), the tax credit goes to the lessor, who typically then passes on the value of the tax credit in the form of lower monthly lease payments.
As such, an alternative, more transparent, more direct, and more equitable approach than the current rules might be to allow taxpayers choosing to lease to deduct the corresponding amount of the deduction over the number of years of the term of the lease.