EV tax credits are under the microscope

With the U.S. presidential election right around the corner, EV tax credits remain a controversial political issue.

Driving the news: EV tax credits have garnered both supporters and detractors following their introduction under the Biden Administration’s Inflation Reduction Act (IRA). For critics, cost-efficiency and effectiveness are some of the biggest issues.

• The anticipated costs of these incentives continue to vary heavily. The initial estimate, calculated in 2022 by the Joint Committee on Taxation, called for around $14 billion in spending between 2023 and 2031. One year later, the same committee found that lowering credits would result in $70 billion in savings. Some economic models even put the price tag in the hundreds of billions.

• Others argue that credits aren’t incentivizing enough buyers, pointing to a perceived slowdown in EV sales, which rose only 3% and 11% in Q1 and Q2 over last year, much lower than many expected.

• While the program was intended to spur purchases among a widespread of car buyers, Rebecca Lindland, Senior Director of Industry Data and Insights at Cars.com, told Barrons that the government is instead incentivizing “early adopters…people that were going to buy an electric vehicle anyway.”

Zooming in: But the data is more nuanced than raw sales numbers, and cost estimates may make it appear, something proponents of EV tax credits are quick to point out.

• While it isn’t clear how much credits will cost the government, consumers are definitely saving money through increased EV adoption. For instance, the Congressional Budget Office was forced to lower its gas tax revenue expectations for 2032 by $4 billion, a decision it attributed to upended consumer fuel expenses in the wake of EV market growth.

• When it comes to sales numbers, performance varies heavily between brands. While overall EV growth hit 11% year-over-year in Q2, legacy automakers are seeing much faster growth.

• Ford, for example, saw its electric sales rise by 61% year-over-year. Although Tesla remains the biggest player in the market by a landslide despite its recent spurt of bad lack, its misfortunes don’t yet seem to be shared by other brands.

Looking ahead: Conflict over tax credits likely arises from fundamental disagreements over the government’s role in directing the economy. For example, many who argue against the IRA say that the market should be controlled by consumers, while those who support it say it expands consumer choice, thus giving buyers more control.

The “political-ness” of the conversation makes it difficult to obtain a firm answer. Furthermore, with only two years of EV credit impact to study, it’s possible there isn’t enough data to come to a reliable conclusion. But whether tax credits are hurting or helping, the answer is likely to become much clearer after the election.

• Republican candidate Donald Trump has promised to slash EV tax credits and lower subsidies targeting electric car production.

• Democratic candidate Kamala Harris is likely to keep President Biden’s policies in place.

Bottom line: Should the incentives go away next year, the market will receive an immediate answer as to whether tax credits have been driving any substantial demand. On the other hand, if they remain in place, the picture will instead become clearer over a longer period of time.

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