In many ways, electric vehicles, or EVs, have never been more affordable and, perhaps consequently, have never been more popular. However, it is not all sunshine and rainbows, as a subset of the population believes a conspiracy theory that the price of gas is being hiked in order to push Americans to buy EVs. The reason the shadowy cabal wants to push America to go electric is unclear. Some reckon it is so they can shut down your car at will—there is no reason they can’t do that with a computer-controlled internal combustion engine—or maybe it is just part of the ongoing “war on fossil fuels.” Rather than being met with skepticism, with gas prices soaring, this should be the EVs’ moment.
How did the electric car go from the darling of conspiracy theorists, in which the consensus in the community was that the oil industry was preventing their production, to a pariah? There are likely many reasons, but from a tax perspective, one key policy isn’t helping their image.
Problem: Non-refundable EV Credit
Most are aware that there is a federal tax credit available when you purchase a new electric vehicle that meets specific qualifications. Among those qualifications are weight limits, battery capacity thresholds, and others. Assuming your vehicle meets those, you simply fill out Form 8936 at tax time and you receive your credit. The Environmental Protection Agency maintains a list of vehicles that meet the qualifications, and Tesla and GM have been phased out. Simple, right? Sort of.
The complication comes in the fact that the credit is not refundable. A nonrefundable credit can reduce your total taxes owed, but not below zero. In other words, if you owed no taxes but purchased a qualified EV, you would not receive a refund from the credit. The credit can only offset taxes owed. A refundable credit, however, can offset taxes owed but will also take your taxes owed below $0—and qualify you for a refund.
The full EV credit is $7,500, but you’d have to make about $65,000 to owe enough tax to receive the full credit. That cuts a lot of folks out—well more than a third of Americans make less than $50,000 annually. The credit needs to be reworked.
Solution: The Revised Middle Class EV Credit
A revised EV credit targeted to benefit the middle class would be tailored to do three things. First, it would make the EV credit immediately refundable. Second, it would be keyed to EVs priced under a set purchase price. Third and finally, the manufacturer phaseout would be eliminated.
A fully refundable immediate EV credit. Rendering the EV credit refundable would eliminate the income floor to receive the full benefit of the credit. The nonrefundable credit system creates a regressive regime; individuals that make more stand to receive more benefit from the program. As gas prices creep ever upward, with no immediate end in sight, households making less money will be disproportionately affected. Under the existing credit system, the individuals who most need to get out of the business of purchasing gasoline are those that will benefit least under the program.
A refundable credit gets us most of the way there, but individuals would still need to wait until they file their tax returns to be reimbursed for their purchase. The IRS has already built the system to issue immediate payments to individuals—it was used for the Advance Child Tax Credit and Economic Impact Payments to offset the costs of Covid-19. Using this system to issue immediate payments in the form of advance tax credits for individuals purchasing EVs would allow more middle-class families to purchase an electric vehicle today.
An EV credit keyed to vehicles priced under $40,000. Tesla has done a lot to advance the perception of what an electric car can be, but it has not come without drawbacks. The lowest cost Tesla is the Model 3, with a 2022 MSRP of $44,990 for the base model—configurations will run you all the way up to $58,990. Additionally, as noted above, a Tesla does not qualify for an EV credit under the current system. For many folks, a $45,000 car is simply not an option.
Setting the EV credit to vehicles priced under $40,000 would do two things: First, it would focus the program on affordable vehicles more likely to be purchased by folks of modest or ordinary means. Second, along with the immediate advance credit, it would incentivize manufacturers to place entry-level models below the $40,000 mark.
Under the existing EV credit system, relatively speaking, you need to make a lot of money and spend a lot of money to get the greatest benefit. But those folks who would consider an EV for the savings on gas are not always in a position to do either. Keying the credit system to lower-cost EVs sets the dividing line between lower-cost EVs, and higher-cost EVs and internal combustion engines. The former qualifies for an immediate credit; the latter does not. The program should not be designed to make expensive electric cars cheaper but to make entry-level electric cars competitive as against their internal combustion engine counterparts without the consumer having to consider gas and maintenance savings.
An individual may not have an additional $10,000 to pay for an electric car today, even if it saves them $20,000 in fuel and maintenance over the life of the vehicle. The EV credit system should be working to lower prices of existing entry-level EVs and incentivize manufacturers to place their entry-level vehicles at an affordable level.
Elimination of the manufacturer phaseout. The existing EV credit is not available for EVs produced by GM or Tesla—there is a phase-out in the program for automakers that have sold more than 200,000 vehicles. This makes good policy sense if the credit is viewed as a stimulus for EV manufacturers, but with gas prices chugging ever upward, the stimulus should be viewed as being for middle-class families. An individual seeking to make the switch to electric should not have to consider the popularity of the vehicle when weighing prices and features.
The automobile manufacturers don’t need to be incentivized to make electric cars—they’re making them. Consumers need to be incentivized and compensated for the potential added cost of adding an EV.
This is the electric car’s moment; a quickly refactored EV credit system can ensure that it is capitalized on. Until now, the government has been chiefly focused on building charging infrastructure, and that is important as well. However, if the EV continues to be viewed as the chariot of the elites, those programs will have the exact opposite effect and will engender the perception of a conveyance caste system. The wealthy are shuttled around in their electric cars, partially paid for by taxpayers, charging at charging stations, partially paid for by taxpayers. Those of more modest means are left to bear the brunt of the burden of higher gas prices or decades of public transportation neglect.
A reimagined EV credit system can make immediate improvements in middle-class fuel expenditures, subsidize cleaner energy, and help ensure an equitable distribution of benefits during a trying time. And as for the conspiracy theorists, if they want to pay for the rising cost of gasoline and subsidize the oil industry, they’ll be free to do so.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Andrew Leahey is a tax and technology attorney in Pennsylvania and New Jersey.
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