US would review tax credit for the purchase of electric vehicles

Electric vehicle subsidies are going in very different directions in different parts of the world. China, for example, has been phasing out support for direct purchase of electric vehicles since 2018 and plans to end its subsidies entirely next year.

The United Kingdom It has also steadily reduced subsidies for electric vehicles, which are now up to 1,500 pounds (about $2,000) for fully electric vehicles and have been removed for plug-in hybrids.

Austria it has just announced plans to end subsidies for electric passenger vehicles altogether this year to shift support towards heavier vehicles.

The United States could end up being an outlier. The plan “Build Back Better” of President Joe Biden included a big push for electric vehicle subsidies in the form of an expansion of the federal disposable income tax credit for consumers.

Under the plan, the cap on the number of vehicles an automaker can sell that are eligible for the $7,500 tax credit would have been removed.

It also included a benefit for vehicles built with unionized labor and an additional bonus for electric vehicles that use batteries made in the US. The maximum tax credit available to an electric vehicle buyer under the plan would have been $12,500, one of the highest in the world.

Build Back Better has been sent back for redesign, but it seems likely that there will be some form of a revised US vehicle tax credit.

On BNEFwe expect an updated tax credit to be passed that includes eligibility for automakers that had already hit the 200,000-vehicle cap, namely, General Motors and Tesla. Buyers of their vehicles no longer qualify for the tax credit.

The list will soon include Toyotafollowed by nissan, Ford and others, as the US electric vehicle market continues to accelerate. An updated tax credit will also likely be provided to consumers at the point of purchase, rather than at the end of the year.

There is no perfect time or way to end a support program like this. If there is a fixed amount of money available or a set completion date, you invariably get surges and spikes in demand as buyers move their buying decisions forward so that your transaction receives the benefit.

Electric vehicle sales in China have been notoriously cyclical over the past five years, with sales rising in December and then falling sharply in January, in part due to changes in subsidies. That makes it hard for automakers to plan, and also provides fodder for critics to falsely claim that the dips prove there’s no real interest in the technology.

The US has managed to avoid some of these peaks and valleys because its tax credits have been phased out. But the market can be distorted in other ways. Residual values ​​for electric vehicles in the United States have generally been low, with the exception of Tesla vehicles.

Part of that is because the technology is improving very quickly. But high federal tax credits may also play a role because buyers compare used vehicle prices to new ones minus the tax credit.

For the industry to really take off, you eventually need a thriving used electric vehicle market, and that gets tricky if residual values ​​aren’t great yet.

The main goal of policymakers who want this kind of support is to bring electric vehicles to the point of takeoff, where adoption begins to accelerate on its own.

Based on a review of different electric vehicle markets, BNEF estimates that the tipping point in adoption typically reaches around 8% to 10% of sales.