Senate KILLS the EV Tax Credit

Omar Qazi (@WholeMarsBlog on Twitter) has a very interesting take on the recent “Inflation Reduction Act” that is very cynical in regards to the EV tax credit. That doesn’t mean it is wrong, but it does go against my general rule of assuming people have good intentions. I’m willing to make an exception to that assumption, though, for government laws, which are known to be quite corrupt in many cases.

Let's be very clear about what the Senate did today: They killed the EV tax credit.

EVs were gaining way too much momentum. Tesla's success is starting to scare legacy auto. So the fossil fuel & dealership lobby repealed the credit & replaced with a handout for themselves.

— Whole Mars Catalog (@WholeMarsBlog) August 7, 2022

Editor’s note: There’s another take on why the domestic battery supply requirements for the EV tax credit in this bill are so strong. We’ll return to the topic with other perspectives as well.

I encourage you to read the whole thread about the EV tax credit on Twitter, but I’ll summarize the highlights of his theory here.

We all know Tesla and Chinese automakers have been running away with the electric vehicle market, and legacy auto has been losing ground every month. What could US Congress do to slow the progress of the EV makers, while claiming to help the environment? How could these Congresspeople repay some of their biggest donors by slowing the EV disruption and subsidizing the laggards? What if they put extreme rules on where the battery is created and where the minerals come from. These rules would be very difficult to meet for the large battery supply needed for battery electric vehicles, but relatively easy to meet for a tiny battery used in a plugin hybrid. By providing a subsidy that is easy for the laggards to use to subsidize their gas and diesel cars, they could put a small $1,000 or $2,000 battery in a car and get a big $7,500 discount. Meanwhile, the companies that build good full electric vehicles may struggle to qualify for any credit.

Some of these plugin hybrids will never even be plugged in, just purchased for the tax credit. I do think most people will figure out that they can save a ton on fueling their cars if they just plug them in. I also think this will help encourage workplaces and apartments to have more level 1 and level 2 charging. So, I don’t think all of the effects of this are bad.

Instead of making the US a leader in electric vehicles, this could cause us to make a lot more plugin hybrids, just as the rest of the world is accelerating its adoption of fully electric vehicles. Let us hope our auto industry survives this legislation and continues to transition to electric vehicles in spite of the obstacles put up by our Congress.

Another matter is that if you sell your vehicles through a dealer network, instead of having to wait till April 15th of the next year to get the tax credit, you can transfer it to a dealer who will apply it to the car sale right away. This is especially useful if you don’t make enough to pay $7,500 in income taxes, since you will then get the full credit, but the problem here is that this alternative option is only available if you transfer the subsidy to a dealer. Startups like Tesla, Rivian, and Lucid that don’t sell through a dealer network don’t have this advantage available to them.

For the last two years, auto dealers have been short of cars due to supply chain issues caused by the way governments responded to Covid-19 and shut down many businesses. Dealers have found they can make more money selling a few cars for large markups instead of selling many cars for small markups. This has given them even more money that they can use to lobby Congress. For more of the insane games the auto dealers have been playing, I highly recommend you watch some of the videos by Lucky Lopez, who lets you see behind the curtain of this world.

I am hopeful that Tesla will find a way to get some of the credits next year, but I’m fearful that Rivian, Lucid, and other startups won’t be able to do that and the unfair advantage to legacy automakers may thus cause them to fail.

Disclosure: I am a shareholder in Tesla [TSLA], BYD [BYDDY], Nio [NIO], XPeng [XPEV], and Hertz [HTZ]. But I offer no investment advice of any sort here.