Published on December 4th, 2017 | by Loren McDonald0
End of Federal EV Tax Credit Would Not Be the Death of EVs
December 4th, 2017 by Loren McDonald
Whether or not the US Congress ends the tax credit for electric vehicles on December 31, 2017, it won’t be a disaster for sales of electric cars in the US in 2018 and beyond. More on that in minute.
First, when the Senate approved its version of new tax legislation on Friday, December 1, there still was no mention of the electric vehicle (EV) tax credit in the text of the Senate bill, H.R.1 — Tax Cuts and Jobs Act. I skimmed through the text Saturday morning. When I didn’t find anything, I was encouraged the credit might survive.
Then I came across some articles and banter on Twitter about an amendment from Senator Flake that would end the credit in the Senate bill (see below). But what many of us missed initially was the “lie on the table” line in the text of the amendment. While I am not an expert in the legislative process (see pages 3-4), after researching this term, it appears that it means the amendment was rejected or postponed for potential future debate.
So, if the Flake amendment was indeed not included in the final version of the Senate bill, then there remains some hope the credit could survive in the reconciliation process. (As a reminder, the House’s version of the tax bill eliminated the tax credit, whereas the original Senate version kept the tax credit intact.)
Regardless, the two versions of the tax bills now will go to committee for reconciliation, where a single bill must be agreed upon, and then legislation is voted on again before being sent to the president to sign.
A big concern, however, is that in the context of all of the other elements of the tax bills, the EV tax credit is just not that significant to members of Congress. As such, during the reconciliation process, Senate committee members might concede to dropping the credit in return for House members conceding one of their proposals that differs from the Senate version.
In short, however, the status of the tax credit remains unknown and still has a 50–50 chance that it will survive.
Elimination of the Tax Credit: What Might It Mean?
Loss of the tax credit would of course have some negative effect on electric vehicle (EV) sales in the US. But the impact will be much less than what many of “the sky will fall” observers predict.
Those in the “EV sales will plummet” camp almost always cite what happened in the state of Georgia when that state ended its tax credit. But as I wrote back in April in “Edmunds: ‘Elimination of federal tax credits likely to kill US EV market’ (Wrong),” comparing what happened in Georgia to the loss of the federal EV tax credit is a mistake.
The loss of the Georgia credit was devastating to sales of the Nissan LEAF because it had become incredibly cheap to purchase or lease. Some LEAF owners in Georgia referred to it as “almost free” when the federal and state credits and other benefits were added together. Nissan also heavily promoted the combined credits and benefits and offered some amazing deals on the LEAF.
In other words, a confluence of factors created an unnaturally high level of demand for the LEAF and one of the cards was removed — it was no surprise that the “house” collapsed. And if you look at the chart below, sales of the LEAF basically returned to the level of sales from the pre-Georgia tax credit. But by comparison, the decline in sales of the Tesla Model S were minimal.
In the case of the federal tax credit, it has of course been in place since 2010 and has become an expected benefit of buying a new EV in the US. But if the credit was so influential in the marketplace, then it should have driven more than the nearly 160,000 in 2016 EVs sales and 1% of new vehicle sales. The ending of the credit will be felt by automakers and consumers, but EV sales will not tank.
What will some of the negative effects of the loss of the tax credit likely include:
◊ Lower-Cost EVs: EVs such as the Fiat 500e, Nissan LEAF, smart electric drive, Kia Soul EV, Ford Focus, and Toyota Prius Prime, that are the least expensive electric vehicles, could see a pretty significant drop in sales. Sales of the new LEAF with longer range could be hurt unless Nissan prices it significantly below the Chevrolet Bolt. And the Prius Prime, which just became the top-selling PHEV, could see a decline in sales in 2018, perhaps even with buyers moving upstream to the Bolt.
◊ On-the-Fence Consumers: Middle-income consumers who have been considering an EV, but for whom the net effect of a lease payment (with the tax credit no longer built into the payment) potentially being $50 to $100 more per month, for example, may be priced out of buying an EV.
◊ PHEV Versions of Internal Combustion Engine (ICE) Models: Directly comparable plug-in hybrid vehicles versus their gas competitors — such as the Ford Focus Energi and several PHEV versions of BMW, Mercedes, and Volvo models which can cost from $5000 to $20,000 more than their non-electric versions — could be hit hard. In these cases, with the tax credits ranging between about $3,000 and $5,000, consumers may have used the tax credit to help justify the higher prices of the PHEV version of the same model vehicle.
◊ Middle-of-the-Country Buyers: Early adopting consumers on the West and East Coast are more likely to purchase EVs because of their green signaling and tendency toward “conspicuous conservation.” Whereas, it is likely that many more consumers in regions of the US that lag in EV adoption will still need more convincing and understanding of the practical benefits of EVs before they will make a purchase. While this is a broad and stereotyped generalization, I would expect states with low rates of EV sales to potentially remain so for the next few years without the credit.
Areas where I expect very little impact from a loss of the tax credit include:
◊ Tesla Models S and X. The tax credit tends to be a nice to have, rather than a must have, for upper-income buyers of these models, generally starting at about $80,000 or more. While the federal tax credit likely convinces a small percentage of upper-income households to buy an S or X, most will make the purchase regardless.
◊ Tesla Model 3: With an estimated 400,000+ Model 3 reservations (globally) and the tax credit estimated to phase out completely to $0 in Q4 2019 or Q1 2020, the impact on the Model 3 is harder to gauge. If, say, 20% of reservation holders cancelled or postponed purchases because of the loss of the tax credit, there would likely still be a greater number of remaining reservation holders to step in and take their place. And so, over the long term, Tesla might see fewer Model 3 purchases, but during the next few years, there will likely still be more demand than supply.
◊ Chevrolet Bolt: We could see a slight decline or slowing in the current and continuous climb in Bolt sales. But, with the Bolt now firmly locked in as America’s favorite “affordable” BEV, it should not be overly negatively affected by a loss of the tax credit.
◊ Upcoming BEVs: Other higher-end BEVs coming to market in the next few years such as the Jaguar I-Pace Concept, Audi e-Tron Quattro, and Bollinger Motors Sport Utility Truck should see little impact, but as they are not yet on the market, there is no way to measure the actual impact on sales from the potential elimination of the tax credit.
For 2018, the key to EV sales is really all about how many Tesla Model 3s are delivered and how well 6 other EVs sell: Tesla Models S and X, Chevrolet Bolt and Volt, Toyota Prius Prime, and the upgraded Nissan LEAF.
Those 7 vehicles combined will likely comprise more than 85% of all US EV sales in 2018. While a few of these might see stagnant sales from a loss of the federal EV tax credit, these 7 EVs have enough national momentum and brand awareness with US consumers that I expect them to sell just fine, thank you.