The EV Tax Credit Phaseout: Necessary or Not?

March 3, 2022 by Vanessa Ishimwe

Fisker Ocean all-electric SUV

By Isaac Golub, Staff Editor

In 2009, the Obama administration created the electric vehicle tax credit to encourage purchasing electric vehicles (EVs). However, the bill included a built-in phaseout that starts once a manufacturer sells 200,000 electric vehicles. Is the current phaseout quota necessary, or is it ending the tax credit prematurely?

History of Electric Vehicles:

Contrary to popular belief, the first electric vehicle invented was not a Tesla, and it was not manufactured in the 21st century. The earliest known electric vehicle in the U.S. was developed in 1890 by William Morrison in Des Moines, Iowa.[1] Throughout the 1900s, interest in a mass-produced electric vehicle was limited because of the vehicles’ low battery range and higher pricing compared to their gas-powered counterparts.[2] In 1973, there was a renewed interest in electric cars when the OPEC oil embargo caused gas prices to skyrocket. This interest was short lived and died down once oil prices settled.[3] Forty years later, in 2003, Tesla was founded by engineers who wanted to popularize electric vehicles.[4] What started as a concept car for many auto manufacturers led to new companies committed solely to manufacturing electric vehicles, including Tesla, Fisker, and Polestar.

Although many consumers started purchasing these vehicles because of climate concerns or to save on high gas prices, many attribute the rise in popularity and demand in part to the federal tax incentive created by President Obama in 2009. The EV tax credit was designed to offset the high production cost of these vehicles, which are ultimately passed on to the consumer.

Under the current provision, any purchaser of a new qualifying electric vehicle is eligible for a $2,500 base tax credit[5], and up to an additional $5,000 credit, totaling $7,500 depending on the battery capacity.[6]

Pros and Cons of the EV Tax Credit:

While the primary purpose of the tax incentive may have been to reduce carbon emissions, it brings many other benefits along with it, including national security advantages.[7] Having more vehicles that are not reliant on gas contributes to our energy independence and can be critical in a time of an embargo or energy crisis.[8]  Additionally, many argue that electric vehicles are only affordable for most consumers with the tax incentive, and a large pool of potential buyers is necessary to make it worthwhile for the auto manufacturers to develop and manufacture EVs.

Critics of the tax incentive, on the other hand, argue it is a subsidy for the wealthy, since 80% of people claiming the tax credit are making over $100,000 a year.[9] Additionally, they  argue that owners of electric vehicles do not purchase gas and therefore are not contributing to the construction and maintenance of our roads, bridges, and tunnels.[10] Many of these infrastructure projects are financed by the federal gas tax, and since EV drivers don’t buy gas, the burden is borne solely by other taxpayers who are taxed every time they fill their tank at the local gas station.[11]

The 200,000 Vehicle Phaseout Provision:

Under the current law, any purchaser of a new electric vehicle is eligible for up to a $7,500 federal tax credit.[12] Once the manufacturer sells 200,000 qualifying electric vehicles it is still eligible for the full credit ($7,500) for the remainder of the quarter and the following quarter.[13] Then, over the next four quarters, the credit is reduced, first by 50% ($3,750) for two quarters, followed by an additional 25% reduction ($1,875) for the next two quarters, until it loses eligibility entirely after five quarters.[14] This limit has been subject to much criticism.

So far, only two auto manufacturers have reached this number and have phased out the credit. Tesla hit the 200,000 milestone in July 2018, followed soon after by General Motors in November 2018.[15]

The phaseout did not come without consequences. After Tesla started its phaseout, demand slowed down, forcing them to cut vehicle prices.[16] Again, soon after General Motors lost its eligibility, sales of its electric vehicles slowed down dramatically. At the end of 2018, they announced they would stop production of both the Chevy Volt and the electric Cadillac CT6, and this was followed by company layoffs.[17]

Someday in the near future, it is likely that most Americans will be driving electric vehicles. Most would agree that at that point, the federal government should stop subsidizing new vehicle purchases. Continuing the incentive forever would be futile and wasteful of taxpayer dollars.

However, the current phaseout limit of 200,000 is clearly detrimental to the EV industry. The two auto manufacturers to reach this number have both suffered immediately, indicating a need to continue the incentive to continue to bring affordable electric vehicles to the market. Especially with the recent skyrocketing gas prices disproportionately affecting low-income Americans, having affordable EVs is of upmost importance.[18] Continuing the tax credit may be costly, but the vast benefits clearly outweigh the costs.

[1] Rebecca Matulka, The History of the Electric Car, U.S. DEPARTMENT OF ENERGY, (Sep. 14, 2004) https://www.energy.gov/articles/history-electric-car

[2] Id.

[3] Seth Fletcher, 40 Years Later: Electric Cars and the OPEC Oil Embargo, SCIENTIFIC AMERICAN, (Oct. 9, 2014) https://blogs.scientificamerican.com/observations/40-years-later-electric-cars-and-the-opec-oil-embargo/

[4] https://www.tesla.com/about

[5] I.R.C. § 30D(b)(2)

[6] I.R.C. § 30D(b)(3)

[7] Nicholas Brown, Electric Vehicles Improve U.S. National Security, CLEANTECHNICA, (Mar. 15, 2013) https://cleantechnica.com/2013/03/15/electric-vehicles-increase-u-s-national-security/

[8] Id.

[9] Mark J. Perry, Taxpayer Subsidies for Electric Vehicles Only Help the Wealthy, AEI, (Feb. 17, 2020) https://www.aei.org/op-eds/taxpayer-subsidies-for-electric-vehicles-only-help-the-wealthy/

[10] Id.

[11] Id.

[12] I.R.C. § 30D(b)

[13] I.R.C. § 30D(e)

[14] Id.

[15] Nora Naughton, GM Hits 200K Cap for EV Tax Credit, THE DETROIT NEWS, (Jan. 3, 2019, 12:43 PM) https://www.detroitnews.com/story/business/autos/general-motors/2019/01/03/gm-hits-200-k-cap-ev-tax-credit/2470868002/

[16] Tom Krisher, Could Tesla Price Cuts Mean Demand is Slowing?, AP NEWS, (Jan. 3, 2019) https://apnews.com/article/644ad296a06249d7bdf77911cce1b617

[17] Sean O’Kane, GM Will be the Second Automaker to Lose the EV Tax Credit, While Bolt Sales Stumble, THE VERGE, (Jan. 3, 2019, 4:17 PM) https://www.theverge.com/2019/1/3/18166619/gm-ev-tax-credit-bolt-sales

[18] Michael Sainato, ‘It’s the Most Stressful Thing’: Rising US Gas Prices Deal New Blow to Homeless, THE GAURDIAN, (Mar. 2, 2022, 5:00 PM) https://www.theguardian.com/business/2022/mar/02/us-gas-prices-homeless-people-living-in-vehicles