In just a few short days (October 1), the federal EV tax credit goes away for both new and used vehicles. There has been a flurry of EV sales leading up to this deadline as people rush to save up to $7500 on an EV purchase.
With these discount no longer being available1, will the EV market in the US crash?
First, it’s important to understand that there were two tax credits with different amounts and limits, one for new EVs and one for used EVs.
For new EVs, you could get up to $7500 off the price when purchasing certain EVs and that can also be applied to reduce the cost of leases on EVs that otherwise might not quality. In order to quality for this, your household income had to be below $300000 (if married, filing jointly) or $150000 (if single) which basically meant that just about everyone qualified.
For used EVs, if the price was listed at $25000 or lower, you could get up to $4000 off (with some restrictions), but your household income had to be below $150000 (if married, filing jointly) or $75000 if single, which meant that many people and many EVs were ineligible.
Although the loss of these tax credits does seem bad on the surface, I suspect that we may actually see the price of new EVs drop once it goes away. Although the new EV tax credit looked like a savings for the consumer, it was in many ways a subsidy for manufacturers as it allowed them to charge more for their EVs to help recoup development costs.
But EVs are no longer an emerging technology and thus the need for a manufacturer subsidy is lessened. I think manufacturers will start to lower the prices on new EVs. For example, last year when the Ioniq 5 was no longer eligible for the tax credit for several months, Hyundai just gave everyone $7500 off the price. Clearly their pricing had signifiant margin to work with.
With the cost of battery manufacturing dropping, the cost to make an EV continues to drop. Combine that with the lower mechanical complexity of an EV and I think we will see prices of new EVs become more affordable, perhaps even undercutting the cost of some equivalent ICE vehicles.
The used EV tax credit did not directly benefit manufactures, instead helping to promote a thriving used EV market. I still think that buying used is a great way to get into the EV world. When shopping for EVs, I always found it annoying that most dealers would show their pricing with the tax credit included, even though not everyone qualified.
However, I think that used EV prices are less likely to drop was the tax credit ends. EVs already have pretty steep depreciation and still look like bargains compared to most used ICE vehicles so there won’t be as much incentive to lower their prices much, if at all. For example, although a 2021 Polestar 2 was a bargain at $20000, it is still a great value at $24000.
So I am hopeful that this elimination of the federal tax credit is not as dire as it might seem at first glance. Certainly, cutting it off with so little notice was reactionary and vindictive. It would have made more sense to announce the credit is going away and then to phase it out by reducing the credit over a longer timeframe, but thoughtful planning is not a forte of the current regime.
It would truly be wonderful if their misguided attempt to kneecap the EV market ends up causing it to grow!
Some state and local tax credits might still be available in your location.
For EVs to succeed, they must be better cars. Outside of Tesla, Rivian and perhaps Lucid and Polestar it's debatable if that's realistic.
Too many are simply an EV version of the gas car. That's the kind of car where a subsidy is needed.
They have to have features regular cars lack, while excelling at the features they share.