US EV Tax Incentive Debate Heats Up In Congress

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President Biden is a strong supporter of the EV revolution. He has issued an executive order requiring the US government to purchase mostly electric vehicles for its massive fleet of vehicles and pledged to put federal muscle to work expanding the supply of public charging equipment for EVs. Next on the agenda is expanding federal incentives to encourage Americans to buy electric cars.

The essence of the Biden proposal is to keep the existing $7,500 federal tax credit in place (and revive it for brands that no longer qualify, which include Tesla and GM at the moment) and add two new tax credits on top of it — $2,500 for electric cars manufactured in the US and another $2,500 for electric cars built in the US by union workers.

So where are we at? Under the Biden plan, buyers could qualify for a federal tax credit of up to $12,500 if they choose to buy an electric car. That’s good, right? Maybe, maybe not. Let’s take a closer look.

The idea of tax credit has a bit of a bait and switch feel to it. If you owe $7,500 of federal income tax, you get it all. If you owe less than $7,500, you get less. For instance, a person who owes $3,000 in federal income tax gets $3,000. Unlike most tax credits, there is no carryover to subsequent tax years. You get what you get in the year you buy that shiny new EV and that’s it. The person who owes $3,000 in income tax will never get the extra $4,500 available. It’s gone.

Also, the credit as we have had it so far is only available on the first 200,000 eligible electric vehicles sold in America by any manufacturer. Tesla has long since passed that number, as has General Motors, which means its customers get no benefit from the federal tax credit any more. That leaves America in the anomalous position of giving tax incentives to people who buy cars manufactured by foreign corporations like Toyota, Honda, Kia, Hyundai, Volkswagen, and Nissan — and, specifically, this now benefits companies that were slower to sell EVs in the US of A.

US senators are also deeply concerned that people who don’t need financial help to buy a vehicle will take advantage of the tax credit. It passed a non-binding resolution recently that would limit the tax credit to families earning less than $100,000 a year and cut it off for any vehicle costing more than $40,000. According to Autoblog, without reviving the extension for Tesla and GM buyers, that leaves precisely 3 EVs that would be eligible — the Hyundai Ioniq, the base Hyundai Kona EV with no options, and the Nissan Leaf. The base-level Chevy Bolt would be eligible, except General Motors has already run through its allotment of EV tax credits. The same for the base Tesla Model 3 (which starts at $39,990). Buyers of all other EVs currently for sale in America would get bupkes.

What’s Wrong With This Picture?

Let’s begin at the beginning. The whole idea of a federal tax credit is wacky. It is the most convoluted and complex way imaginable of incentivizing people to buy an electric car. It involves a welter of complicated IRS forms accompanied by a compendium of arcane rules and regulations. Dump that idea and make it a rebate program. Buy a qualifying car and get a stated amount off the sticker price. Boom. Done. Move on.

Sure, put a maximum price on the cars that qualify if you want, but ditch all this tax credit mumbo-jumbo. Among other things, it gives more of an advantage to wealthier buyers when part of the EV push is to make electric cars more affordable for people of modest means.

Next, open up the rebate to all manufacturers regardless of the number of electric cars they sell. If the goal is to get more EVs on the road, why use a policy that punishes companies for building electric cars that people actually want to buy?

What Does “American Made” Even Mean?

We need to stop kidding ourselves. Under the terms of NAFTA, or whatever it is called today, vehicles assembled in Mexico and Canada using parts sourced from multiple foreign countries qualify as “American made.” Teslas, which come closest to being actual “made in American cars,” are excluded from all federal EV incentives. The Model 3, a terrific car chock full of cutting edge technology, actually retails for less than $40,000, but is not eligible. Does any of this make any sense?

Politicians should stop playing word games with people. “American made” does not mean “made in America,” it means something entirely different. Most people have no idea where the cars they buy are made or what their local content is. If Congress wants to increase the number of vehicles manufactured in the United States, it should say so explicitly and create policies to achieve that end instead of crafting legislation design to bamboozle the voters into thinking they are getting one thing when in fact they are getting something else entirely.

The Union Provision

Joe Biden owes his successful campaign for president in part to strong support from unions, so it’s logical that he would want to reward them now that he is in office. But that plan is getting significant pushback from non-union automakers like Toyota, Honda, and Volkswagen. All three are busy sending their lobbyists to Capitol Hill to oppose the extra $2,500 incentive for EVs manufactured by union members.

Autoblog reports that Honda issued a statement this week in which it said, “Our production associates in Alabama, Georgia, Indiana and Ohio deserve fair treatment from Congress and should not be penalized for their choice of a workplace.” Toyota North America followed the next day with a statement saying, “This policy would unfairly discriminate against American autoworkers based on their choice of whether to unionize.”

Autos Drive America, an industry trade group that represents foreign automakers, added, “It is baffling that Congress is pushing electric vehicle incentives that only benefit union workers in certain states. Today, half of all vehicles manufactured in the U.S. are built by Americans who have chosen not to join a union. Congress needs to keep full incentives for all-electric vehicles and not play favorites.”

The Takeaway

All federal EV incentives are now grist in the mill known in Congress as the budget reconciliation process. They are just a small part of Biden’s $3.5 trillion infrastructure and social justice plan that will undoubtedly get whittled down considerably during the legislative process

But the point is, if the objective is to make electric cars more affordable for people of modest means, federal tax credits are the clumsiest way to get there. A $12,500 tax credit will be of no use to many (most?) Americans. If Biden wants people to buy electric cars, make it easier to do that instead of something so complicated that few will benefit.

According to NBC News, a 2019 study by researchers at the University of California Davis found that Black and Latino car buyers account for 41% of gas-powered vehicle purchases but only 12% of electric vehicle purchases. Under-served communities bear the brunt of the harm caused by vehicle emissions but will benefit the least from a federal tax credit.

Congress needs to enact rational EV incentives that don’t require buyers to hire accountants to obtain the benefits. The current system may have been appropriate more than a decade ago when it began, but it has outlived its usefulness today and needs to be replaced with one that provides real benefits to real people. That is probably too hard of a concept for most politicians to grasp.