Electric Vehicles: Expansion of Tax Credits for EVs

Democrats have proposed an expansion of the tax credit for the purchase of some electronic vehicles (EVs). This credit is part of President Biden’s goals of increasing the percentage of EVs on the road and boosting U.S. union jobs.

Overview of the tax credits

The proposed EV tax credits would provide buyers of EVs made in the U.S. by union labor with a credit of $12,500. Buyers of EVs manufactured elsewhere would receive a $7,500 credit which is unchanged. If the vehicle’s battery is made in the U.S. these buyers would receive an additional $500 credit.

As you might imagine, Elon Musk and other manufactures whose vehicles don’t qualify for the maximum credit are upset by this proposal.

The credits would last for 10 years and allow buyers to deduct the value of the credit from the EV’s sale price at the time of purchase. Initial estimates of the cost of the credit over ten years were in the $33 to $34 billion range. The Joint Committee on Taxation subsequently revised that estimate to $15.6 billion.

Overview of Tax Credit

As mentioned above, the proposed tax credit would be $12,500 for EVs made in the U.S. with union labor. EVs manufactured elsewhere and/or with non-union labor would qualify for a $7,500 credit with the opportunity for an additional $500 credit if the battery is made in the U.S with union labor.

Taxpayers with an adjusted gross income that is no higher $400,000 would be eligible for the proposed credit. The credit would be limited to cars priced at more than $55,000 and trucks priced at no more than $74,000.

In addition to a credit for new vehicles, the proposal would add a credit of up to $2,500 for used EVs. The credit would apply to used EVs that are at least two years old and that cost no more than $25,000. Adjusted gross income would be limited to individuals with a maximum AGI of $75,000 and $150,000 for joint filers.

The proposed changes to the credit would also remove the phaseout of the credit for companies that have sold over 200,000 EVs, benefiting Tesla and GM.

Criticism from automakers

While domestic automakers and unions like the credit, those automakers whose vehicles would not be eligible for the full credit have voiced their displeasure.

Elon Musk of Tesla has voiced his criticisms as have automakers such as Toyota, Honda, Kia and Nissan oppose the proposed credit as being biased due to the requirement that union labor be used in the manufacturing of the EV. Musk recently tweeted, “This is written by Ford/UAW lobbyists, as they make their electric car in Mexico. Not obvious how this serves American taxpayers.”

While some of these automakers have operations in the U.S., their U.S workforce is largely not represented by unions.

Ford, GM and Stellantis (formerly Fiat, Chrysler) support this credit as you might expect. “This legislation will help more Americans get into EVs, while at the same time supporting American manufacturing and union jobs,” according to Kuma Gallhotra who is Ford’s president of the Americas and international markets.

How will this impact the auto industry?

Certainly, the availability of the credit can provide an incentive to care buyers who might be considering an EV and are on the fence. Beyond that, it’s hard to say if the higher credit for the domestic, unionized auto makers will work as intended.

A lot of EV buyers have tended to be in higher income brackets and may or may not be eligible for the credits. These buyers often purchase Teslas and other EVs for reasons beyond financial incentives and make their brand choices based on their preferences.

Where the incentives could help spur demand is with middle class buyers who might be incented to purchase EVs.

To the extent that the automakers can spur demand for their EVs within the broader car buying market, these incentives could be a factor in boosting their EV sales and a boon to their bottom lines.

Investors considering buying shares of either the likes of Ford and GM, or Tesla and other EV manufacturers should look at the projected impact of these credits on each company specifically as part of their stock analysis.

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