Ending Federal EV Tax Credits Is the Opposite of Improving Market Competition

The new year typically brings with it new proposals on what to do with the federal EV tax credit, and 2019 is no different. Three bills have been introduced to Congress that would reshape, or all together eliminate the tax credit. The Trump administration has also stated its intentions to eliminate the tax credit. The multiple proposals make it sound like the credit is a terribly designed policy. Arguably there are some things that could be tweaked, but considering the alternatives, it has been a reasonable approach to encouraging marketwide plug-in EV (PEV) development.

The federal tax credit was designed to phaseout for each manufacturer once they sell 200,000 eligible vehicles in the US. After hitting the 200,000 limit the available tax credit is halved for the next two quarters ($3,750), halved again for another two quarters ($1,875), and then the automaker’s vehicles are no longer eligible. This phaseout scheme is unique among major global governments and is notable for how it evenly distributes government support to all market players.

Both General Motors (GM) and Tesla hit 200,000 sales in 2018, meaning the available incentives for their vehicles will be reduced in 2019 and eliminated by 2020. If the current policy is maintained, companies that are behind in the PEV market will now have a pricing advantage and be better positioned to catch up with the market leaders until they too hit their limit.

Proposals for the Future of the Tax Credit

• Delivery Limit to Time Limit—House Bill (HB) 2022: This bill would remove the 200,000 cap, and end credit in 2022. This bill would be great for Tesla, GM, and Nissan, but not so much for other EV makers. However, this change would likely create a significant bump in PEV sales over the next 3 years as automakers race to increase sales volumes and credit yields.

• Delivery Limit to Time Limit—HB 2028: This bill would also remove the 200,000 cap, but end credit in 2028 and change the tax credit to a sales rebate. This proposal would be of benefit to all EV manufacturers, but would be more beneficial to leaders like Tesla, GM, and Nissan than others. Additionally, the nuanced change from a tax credit to a rebate would also be a beneficial change as it would bring forward typical end-of-year sales peaks and would easily translate to customer purchase costs.
  
• Tax Credit Termination: is not yet available on Congress’ website. This bill would terminate the EV tax credit, and it initiates a new fee on alternative fuel vehicles. The Trump administration has also announced its intention to terminate the credit as soon as 2020-2021. Note: 
  

Any early termination of the tax credit will be to the disadvantage of companies late to develop PEVs, like Ford and Fiat Chrysler Automobiles, or any of the emerging EV startups like Rivian. It would instead benefit those early to the market, such as Tesla, GM, and Nissan among others.

Slowed, but not Stopped

The market is going electric. Removing the incentive would slow the transition but will not stop it. As such, removing the credit prematurely will implicitly pick winners. Other companies will struggle to catch up and have to subsidize newly developed PEV purchase costs significantly to stay competitive. This could be ruinous to established automakers trying to make the transition and it would likely be a death knell for PEV startups.