A $32 billion plan to hike the federal tax credit for EV purchase to as much as $12,500 seems likely to squeak through the House this month but faces an uncertain future in the Senate.
The EV plan is part of the $1.75 trillion social and climate spending package that has no Republican support and needs the votes of all 50 Senate Democrats to pass. So far, it doesn’t have them.
A number of Senate members, most notably West Virginia Democrat Joe Manchin, have said they want to make changes to various pieces of the spending package before they will support it.
A slightly different version of the EV incentive was introduced earlier this year in the Senate but has been sitting in the Senate Finance Committee since April while the House worked its version into the social and climate spending plan.
None of the senators objecting to provisions in the House version of the social and climate plan have specifically mentioned the EV component, but Congress has been heavily lobbied by import automakers and their governments to do away with key elements of the incentive measure that favor domestic automakers with union workforces.
The House package was to have been voted on Friday but a group of moderate Democrats balked at the last moment, forcing a delay until the Congressional Budget Office weighs in with its estimates of the cost of the bill over its 10-year life. That could take a week or more.
The reluctant moderates have agreed, however, to support the package if the budget office numbers agree with estimates already published by the Treasury Department and Congress’ Joint Committee on Taxation, which is made up of equal numbers of Republicans and Democrats.
Meantime, President Biden signed a separate $1.2 trillion infrastructure spending plan that includes $7.5 billion for public EV chargers around the nation. Together the infrastructure and social and climate plans make up the Biden Administration’s Build Back Better program.
According to General Motors, it will host Biden at its factory on Wednesday, November 17, when the automaker opens the door to Factory Zero where it plans to build 250,000 battery electric vehicles per year.
Bigger Bucks for Union-Built
The social and climate spending plan calls for a total of $555 billion for various climate and clean energy programs including the EV incentives increase designed to entice Americans to purchse the zero-emissions vehicles.
In months of closed-door negotiations in the House, the EV plan survived relatively intact despite a controversial requirement that would create a multi-level tax credit with the highest amount reserved for electric vehicles built in U.S. plants with unionized workforces.
Of the 51 EVs and plug-in hybrids in the market today, the Chevrolet Bolt and Bolt EUV would be the sole qualifiers for the full $12,500 credit—and that’s only because the plan would eliminate the present sales cap on eligibility.
The incentive available for almost all EVs built outside of the U.S. as well as for those built domestically but with non-union labor would be $7,500 (the same as it is today). The measure adds $500 for any qualified vehicle with batteries made in the U.S. and another $4,000 for vehicles built in the U.S. with union labor (totalling $12,500).
The bill requires an EV to have at least a 40-kilowatt-hour battery to be eligible for the base $7,500 tax credit. Below that the base would be $4,000. There are still three EVs with less than 40 kWh battery capacity on sale in the U.S: the Hyundai Ioniq Electric, Mini Cooper SE and the just-introduced Mazda MX-30 (available only in California).
The present tax credit formula sets a base credit of $2,917 for a 5-kWh battery and increases it by $417 for each additional kilowatt hour of capacity until the $7,500 limit is reached at 16 kWh and above.
All 19 EV models sold in the U.S. have batteries well in excess of 16 kWh, as do six of the 32 plug-in hybrids. No plug-in hybrid has less than a 9-kWh battery, making $4,585 the smallest tax credit available now.
Plug-in hybrids may lose eligibility for the federal tax credit because the House version would allow the credit only for PHEVs with tiny gas tanks not exceeding 2.5-gallon capacity. That’s essentially a range-extended EV, not a PHEV like Toyota’s popular RAV4 Prime, which has a nearly 15-gallon tank and currently qualifies for the full $7,500 tax credit.
With BMW’s decision to discontinue U.S. sales of its i3 range-extended EV this year, there are no PHEVs in the market that would meet a 2.5-gallon requirement.
Import Brands Angry
None of the European or Asian automakers with U.S. plants use union workforces, so only EVs from Ford, General Motors and the Chrysler arm of Stellantis would qualify for the entire $12,500 incentive. And not all of their EVs would benefit. The popular Ford Mustang Mach-E, for instance, is built in Mexico so doesn’t meet the domestic production requirement.
Most car companies penalized by the plan’s admittedly pro-union provisions have been lobbying intensively to block it. While they failed with the House they are expected to step up their opposition as the measure moves to the Senate, where several Democrats are from Southern states with large auto manufacturing plants with non-union workforces.
Several of the import automakers also have prevailed on their home nations’ government and trade officials to begin lobbying against the pro-union provisions, claiming they violate the spirit if not the letter of various international trade agreements. A group of 25 foreign ambassadors to the U.S. last week sent a letter to Congress opposing the two-tier incentive.
Income Cap Down, Price Limit Up
While its key provisions made it through the House unscathed, there were three changes to the initial EV incentive plan: increasing the price cap on eligible vehicles, lowering the income cap for qualified buyers and turning the nonrefundable tax credit into a refundable and transferable credit.
The incentive measure now caps eligibility to buyers whose annual taxable incomes don’t exceed $250,000 for single filers and $500,000 for joint filers. Initially, the caps were set at $400,000 and $800,000.
Republicans in both the House and Senate have argued that the income limits still are too high and mean that a lot of incentive money would be going to relatively well-to-do people who don’t need the assistance. The median household income in the U.S. in 2020 was just under $63,000, according to the U.S. Census Bureau.
Close to 95% of all taxpayers would be eligible for the EV incentive under the proposed income caps, according to data from 2019, the latest year for which the IRS has published statistics.
Only 1.6% of the 153.8 million individual income tax returns filed in 2019 reported adjusted gross income (AGI) in excess of $500,000. Just 4.4%, or 6.9 million returns, were for AGI in the $200,000 to $500,000 range, while 21.1 million taxpayers, or 13.8% of the total, reported AGI in the $100,000 to $200,000 range.
The measure also now increases the price cap on eligible SUVs and pickup trucks to $80,000. It previously had caps of $64,000 for electric vans, $69,000 for SUVs and $74,000 for pickups. The cap on electric passenger cars remains unchanged at $55,000.
The cap is based on the vehicles suggested manufacturer’s retail price, or MSRP, and doesn’t preclude options and add-ons that take the base price over the limit.
The price caps would eliminate eligibility for several Tesla models, most of the GMC Hummer lineup and many luxury and high-performance EVs and PHEVs from domestic start-ups Lucid Motors and Bollinger Motors as well as from European manufacturers including Audi, Bentley, Ferrari, Jaguar, Land Rover, Mercedes-Benz and Porsche.
Cash-back Credit
The Senate version of the EV incentive proposal would have turned the present EV tax credit into a point-of-sale cash payment to be applied directly against the purchase price of the vehicle. The version passed by the House, keeps the tax credit but makes it fully refundable to the tax payer and is transferable—meaning dealerships can let EV buyer apply their credits to the purchase price, effectively making them point of sale rebates.
The benefit to car buyers is that point-of-sale incentives lower the immediate price of purchasing an EV. A non-transferable tax credit ultimately lowers the lifetime cost of owning an EV, but doesn’t reduce the purchase price because it cannot be claimed until buyers file their annual income tax returns.
Additionally, the present tax credit can’t exceed a buyer’s federal income tax liability for the year of purchase. For example, an EV buyer with an $8,000 tax bill would receive the full $7,500 to apply as a credit, while a buyer with a $6,000 bill would only be able to claim a $6,000 credit.
In the EV incentives proposal in the climate spending package, the credit would become refundable to EV buyers who didn’t transfer it to the dealership. If the buyer of an EV built in the U.S. with union labor had a $10,000 income tax liability, for example, the annual tax bill would be paid from the $12,500 incentive and the taxpayer would receive an additional $2,500 check.
Back in the Game
Unchanged in the plan is a provision that would end the limit on how many EVs an automaker can sell before losing eligibility for federal tax credit. The present lid is 200,000 vehicles, which means buyers of Tesla and General Motors EVs cannot claim the federal tax credit for their purchases.
Several other automakers are fast approaching the sales cap.
Toyota sold almost 190,000 plug-in hybrids through September 2021; almost 14,000 sales were in the third quarter alone. At that pace, it’s likely to hit the 200,000 cap before year end.
Ford is close behind Toyota and with more than 250,000 advance orders for its Mustang Mach-E and F-150 Lightning EVs, and is likely to top the 200,000 mark early in 2022 unless ongoing microchip shortages continue to constrain production.
Nissan sold 161,500 Leaf EVs in the U.S. through September 2021 and is about to introduce a new longer-range model, the Ariya, that should push it over the 200,000 limit sometime in 2022.
Both GM and Tesla have argued that ending their incentive eligibility after 200,000 sales—Tesla hit the cap in 2019—punishes them for being successful at marketing the electric cars the government wants to promote. They contend that removing the lid would level the playing field.
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Beyond the Personal EV
In addition to incentivizing purchase of new EVs, the climate spending proposal would create a new $4,000 federal tax credit for used EV purchases as well as credits for electric bicycles, motorcycles and commercial electric vehicles.
The commercial EV credit would be for up to 30% of the vehicle’s cost and would apply only to fully electric commercial vehicles with batteries of at least 30 kWh capacity.
The measure also calls to extend the present $8,000 federal tax credit for fuel-cell electric vehicles until 2031.
Next Up
After winning House approval, the social and climate spending bill with its EV incentive plan must win Senate approval.
While Manchin, the West Virginia Democrat, has said he won’t vote for the bill until he knows how it will be paid for, Congress’ own Joint Committee on Taxation has estimated that the legislation would raise $1.48 trillion in new tax revenue over the 10-year period.
Treasury Secretary Janet Yellen has said the legislation would raise more than $2 trillion through taxes plus improved IRS enforcement and savings from Medicare’s ability to negotiate the cost of some medications.
Pelosi said that she expects to bring the measure to the floor for a vote in the House before Congress adjourns for the Thanksgiving break.
If the measure passes, as expected, it could take several more weeks for the Senate to vote on its version, which would then go to a joint conference committee where a mutually agreeable version would be hammered out and voted on again by both chambers before being sent to the White House for the President’s signature.