Much Needed Electric Vehicle Tax Credit Reforms Finally Announced

· · 9 years ago

One of the biggest challenges that I’ve harped on with the burgeoning plug-in electric vehicle (PEV) market is that the vehicle pricing remains high regardless of whether tax incentives are available. Why? Because if I want to buy a Nissan LEAF or Chevy Volt, I still have to pony up (or finance) the full MSRP of either $33,000 or $42,000 and wait until tax time to get the credit. The vehicle costs alone will eliminate a lot of potential buyers simply because they won’t be able to afford to finance the vehicle.

The way tax credits work, this could net you the full $7,500 in a refund, but more likely you will receive a refund of less than $7,500 (although you may still retain the full value of the tax credit). This gets confusing, so some examples might be helpful. For this example, we’ll consider a single person with one exemption earning $70,000 of taxable income per year. Note that these are simplified examples, not tax advice. I am not a tax expert and you should discuss your taxes and potential tax credits with your tax professional.

EV Tax Credits

In the first example (A), the recipient gets the full value of the tax credit and ends up with $6,719 cash come April (we’ll just assume they then put that cash right towards paying down their car debt). Overall, this is not too bad.

However, if you are more like the person in example B and have been working to reduce your tax bill through other deductions and other tax credits, then you won’t get the full value of these credits and this credit could possibly be worth significantly less. In example B, the recipient went on a buying spree, bought a home and a PEV, but only receives $7,481 value from their $15,500 in tax credits, and they only end up with $7,200 in cash.

Last week, Vice President Biden announced three initiatives aimed at driving the PEV market to 1,000,000 vehicles by 2015. The first of these is a much needed change to the way the PEV tax credit works. This would give the tax credit to the dealer who then would pass along the savings to the purchaser at the time of purchase much like the Cash for Clunkers program (I’d like to suggest they call this the “Greenbacks for Non-Gassers” program).

The president’s second and third initiative are to increase support for battery and electric drive R&D and increase recharging equipment grants to communities. These are both important initiatives as well, but as most dealers will tell you, cash incentives are one of the easiest and fastest ways to drive sales volume. Prior to these announcements, Pike Research has been predicting that the U.S. light duty PEV sales will be just over 232,000 vehicles in 2015. Will these initiatives be enough to boost this market another approximately 770,000 vehicles that year? It seems unlikely, but they will certainly move the market in the right direction.

Of course, now the challenge looms of getting this change passed through what is expected to be a very contentious budget season. However, I am optimistic that at least the tax credit will get reformed.

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