Originally published by Union of Concerned Scientists, The Equation.
By Jonna Hamilton, Director of Policy, the Clean Transportation Program at the Union of Concerned Scientists (UCS)
We have been waiting with bated breath for the new version of the electric vehicle (EV) tax credit from Congress. Today, the House Ways and Means Committee, the House committee that writes the tax code, worked through the energy portions of the Build Back Better Act, aka the reconciliation bill. They significantly reimagined the EV tax credit that consumers can get when they buy a new EV and added a credit for the second owner of the EV as well.
As a reminder, this is a necessary action because of how the tax credit is currently structured — right now, if you buy an electric vehicle made by GM or Tesla, you are no longer eligible to take the tax credit. We have been advocating for an update to this credit for a while (for some background, here is what we thought the solution was in 2019).
The proposal from the Ways and Means Committee extends the credit for a decade and also changes the credit to make it better for consumers. It does also complicate it somewhat, so bear with me.
How much is the credit now?
The current credit is $7,500 for pretty much any EV on the market. This bill allows up to a $12,500 credit, but that depends on a few factors.
- The base credit is $4,000 for any vehicle that has a battery capacity of 7-10 kWh, depending on the year of manufacture (spoiler alert – ALL EVs meet this criteria).
- A higher battery capacity gets you more money — $3,500 is added to the base amount if the battery capacity is 40 kWh or more through 2026 and 50 kWh or more after 2027 (spoiler alert: Most battery electric vehicles meet this criterion already. If you’re buying a plug-in hybrid vehicle, your credit will not get this bump).
- To incentivize domestic assembly of EVs (literally where the car is assembled) and a workforce protected by a union, an additional $4,500 is available for vehicles manufactured in the U.S. by a unionized workforce.
- Finally, if 50% or more of all of the components that make up a vehicle are made in the U.S., as well as the battery cells, you get an additional $500.
How is the new EV tax credit better for consumers?
In addition to the fact that you might be getting a $12,500 credit (!!), you can now definitely take the incentive. The issue with the old credit is that it was a tax credit. Pardon me while I explain how tax credits work for folks who, like me, don’t think about them all the time. (If you already understand what it means for this tax credit to now be refundable and transferable, skip ahead to the next section.)
Tax Credit — this is something you can deduct from the taxes you owe the government. So, if you owe the government more than $7,500 in a year, you can deduct that amount from what you owe Uncle Sam if you bought an electric vehicle that year. Which is great, unless you don’t owe Uncle Sam that much, in which case you can only deduct up to the amount you owe. In order to owe the government that much, you pretty much need to make over $100,000 if you’re married filing jointly.
Refundable Tax Credit — Same as above, except that if you don’t owe Uncle Sam more than the amount you would get for the credit, Uncle Sam will PAY YOU! It ensures that you still get the full value of the credit, even if you don’t happen to owe the government that much in the year you bought your EV.
Transferable Tax Credit — This allows someone else to take the credit for you and just give you the cash. There are a couple of great scenarios for this — first, if you go the dealer to buy your car, the dealer can take the credit and apply the value of the tax credit to your sale price. Voilà, instant rebate off the price of the car. Currently dealers can only do this if you lease the car, so it will be great to have this work for sales as well. Policy-wise, this is the best way for an incentive to work — nobody has to wait till April to get their tax credit, they immediately have the value of the credit deducted from the price of the car! Also, this is great for non-profit entities like cities or states because they can also get the incentive by transferring it to another entity (non-profits don’t pay taxes, so no tax bill to Uncle Sam).
Okay, unglaze your eyes — this means that the tax credit can now work as a point-of-sale rebate, giving you, the consumer, the value of the credit at the time you buy the car. Hooray!
There’s always a catch, what’s the catch?
There are some new parameters around the tax credit, which will impact your purchase decisions and whether you can take the credit.
First, there are now income caps on the credit. Generally, it’s expected that higher-income individuals are more likely to buy an EV regardless of whether or not there is an incentive. The new credit has income caps for taking the credit ($400,000 individual and $800,000 for married filing jointly — still pretty generous, if you ask me).
Second, there are also MSRP caps (I bet you innately know what an MSRP is, but may not know what it stands for — Manufacturer’s Suggested Retail Price). Instead of doing a one-size-fits-all cap, the committee designated four caps for different types of vehicles. The caps part of this means that you can’t get the credit if the car/SUV/truck you want to buy has a MSRP higher than these values:
- Sedans — $55,000
- Vans — $64,000
- SUVs — $69,000
- Pickup trucks — $74,000
In general, smaller vehicles cost less and bigger vehicles cost more, so this ramping makes sense — the truly luxury vehicles in each market segment won’t be incentivized, but having a lower cap for sedans doesn’t mean that you can’t get the credit for buying a SUV or pickup. If you’re interested in what different types of vehicles normally sell for, you can check out Kelly’s Blue Book, and here’s a handy list of EVs currently available in the U.S. with their MSRPs.
What are people saying about the new and improved EV tax credit?
Generally, the response to this proposal has been positive.
However, there are a few naysayers. Tesla isn’t unionized and Elon Musk took to twitter to note his displeasure with the adder for unionized plants. They will also have a few models that won’t qualify for the credit, but at the moment none of their customers have access to the tax credit, so this seems helpful to them on the whole.
There are other companies who don’t seem to want unions in their plants — they only build plants in right-to-work states (i.e., states that have made it clear that employees don’t have to join unions if their plants are unionized) and they don’t want to see the credits consumers can get for their vehicles decreased because they aren’t unionized — Toyota and Honda seem to be the leaders in this complaint. Honda and Toyota were in fact quoted over the weekend effectively saying they would work against this great new incentive because it discriminated against workers who chose not to unionize (or companies who didn’t want unions?). It’s not like either of these companies are really on the leading edge of bringing you amazing EV choices, so that’s probably also part of it.
In order for the U.S. to lead in the future of transportation, we need to do the research here and build the batteries and EVs in the U.S. The automotive industry must rapidly shift away from its fossil fuels roots to a new strategy centered around electrification. As we make that shift, UCS thinks it’s critical we invest to ensure those future jobs are here in the U.S. and in support of well-paying jobs.
But wait, there’s more
There’s actually a lot more happening as the House is working through their reconciliation bill, but I want to flag quickly that the Ways and Means Committee has also included an incentive for used EVs. Used car buyers outnumber new car buyers by more than 2 to 1, so it’s critical that as EVs enter the used car market, that they are made available to these buyers as well. As such, Congress is putting in place a used car incentive of $2,500 or 30% of the purchase price. It will be available only for the second owner of the vehicle and only if they make less than $150,000 per household. The goal of this credit is to make sure everyone can experience driving and EV and take advantage of the significant fuel savings an EV offers, not just people who can afford to buy new cars.
There are also provisions in the tax bill to incentivize infrastructure buildout, incentivize the purchase of EV trucks (delivery vans, trash trucks, and even tractor trailers), provide funds for manufacturers to build domestic battery, component, and assembly plants, and also reduce the carbon intensity of electricity generation.
Congress is very busy right now, pushing for climate wins in the Build Back Better Act and UCS is going to support these efforts. It would be great if you could weigh in with your Senators and Congressperson to register your support as well!
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