Sales of electric vehicles (EVs) doubled in 2021 from the prior to a record level of about 6.6 million vehicles worldwide. In 2012 this number was just 120,000 EVs sold.
The popularity of EVs, coupled with the recent ruling in California regarding the sale of gas powered vehicles and the recent incentives passed by Congress, bode well for the future of EVs.
What could California’s recent decision to phase out the sale of gas-fueled vehicles mean for the rest of the country?
California’s recent decision to require that all cars, trucks and SUVs be powered by electricity or hydrogen by 2035 could have huge implications for the rest of the country and certainly the automobile industry.
The rules allow for 20% of vehicles sold in California after 2035 to be plug-in hybrids, but the rest must be powered by electricity or hydrogen. Washington and Massachusetts have indicated that they will look to adopt similar measures to those adopted by California. New York, Pennsylvania and 15 other states have already adopted some or all of California’s vehicle emission standards that are stricter than those in place at the federal level.
As the largest auto market in the country, and a large and influential state politically, it’s not surprising that other states have indicated that they are considering following California’s lead.
Changes to the EV Tax Credit
The recently passed Inflation Reduction Act offers an EV tax credit to encourage consumers to purchase EVs. The new credit, which takes effect on January 1, 2023, differs from the existing EV tax credit in several ways.
- The existing tax credit applies only to new vehicles. The new tax credit includes both new vehicles and used vehicles. The maximum credit for a new vehicle is $7,500 regardless of how many new vehicles are sold in total, the maximum used vehicle credit is $4,000.
- Unlike the existing credit, the new credit is applied at the time of sale, buyers do not have to wait to receive the credit when filing their income tax return for the year. This can be helpful in cases where the buyer is financing the purchase, this immediate credit can help reduce the amount they need to borrow.
- The new credit does include restrictions on the buyer side. First the MSRP of the vehicle must be below $55,000 for sedans and $80,000 for SUVs, vans and trucks to be eligible for the credit. This will preclude buyers of higher end EVs from receiving a credit.
- There are also restrictions on the buyer’s modified adjusted gross income (MAGI) in order to qualify for the credit. There is no such restriction with the current credit that is in place. For single filers their MAGI must be no greater than $150,000, for those who are married and file jointly the MAGI limit is $300,000 and for those filing as head of household the limit is $225,000. The thought process here is likely that higher income buyers don’t need this type of incentive to persuade them to buy an EV.
Another key difference, and a factor that will limit which vehicles qualify for the new credit, is that eligibility for the credit is limited to vehicles manufactured in the U.S. and that are powered by batteries whose materials are sourced from the U.S. or countries considered our free trade partners. This could actually allow fewer vehicles to qualify than under the rules surrounding the current credit.
Many American EV manufacturers, including Tesla, utilize battery materials purchased in China. The language in the bill classifies China as a foreign entity of concern making these vehicles ineligible. Additionally, any vehicle that is not assembled in the United States, Canada or Mexico is ineligible for the credit.
The end result of these restrictions is that fewer manufacturer’s vehicles will qualify for the credits, it will remain to be seen how this impacts the number of buyers who qualify.
Even with these restrictions and complications, the combination of the new tax credit and the ruling in California and perhaps other states should help stimulate the sales of EVs.
Daniel Ives, Managing Director and Senior Equity Research Analyst covering the Technology sector at Wedbush Securities says, “This EV tax legislation is a watershed event for EV adoption in the U.S. over the next decade. We believe this will be a key catalyst to accelerate EV adoption by 10% in 2030 vs less than 3% today. The California 2035 act will further propel EV adoption with Tesla, GM, Ford and Rivian front and center.”
To discuss if investing in the EV sector is right for your portfolio, please contact your Wedbush financial advisor.
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