Even before Donald Trump began his second term as president, his transition team was reportedly working on plans to eliminate the up to $7,500 federal tax credit for EV purchases.
This policy shift, first reported by Reuters, rippled through the automotive industry and sparked discussions about the future of clean energy initiatives in the U.S.
More recently, Trump signed an executive order, "Unleashing American Energy," to potentially dismantle the EV incentive and related policies. Now, two Senate Republicans have separately proposed legislation that would eliminate the credit in one case and impose a $1,000 fee at the time of purchase in the other.
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So, what does this mean if you’re in the market for an electric vehicle? Read on.
$7,500 EV tax credit in doubt
The federal EV tax credit, a cornerstone of President Biden's Inflation Reduction Act (IRA), has been a popular incentive for consumers considering switching to electric vehicles. Data show it has helped make EVs more affordable for a broader range of buyers.
However, the Trump administration appears ready to dismantle this program as part of a broader tax reform package.
Note: Trump is focused on extending sweeping legislation from his first term, the Tax Cuts and Jobs Act (TCJA). The Center for American Progress reports that the TCJA primarily benefited the wealthy, and the Congressional Budget Office estimates that extending the full TCJA could cost $4.5 trillion.
- Critics argue that eliminating the EV tax credit could harm efforts to reduce carbon emissions and combat climate change.
- Some environmental groups and industry analysts warn that EV adoption rates might slow without these incentives, especially in a market where many consumers are still price-sensitive about electric vehicles.
- On the other hand, proponents of ending the tax credit argue that the market should determine the success of EVs without government intervention.
The argument is that if electric vehicles are superior and cost-effective, they should be able to compete without subsidies.
'Unleashing American Energy' executive order
Key provisions of Trump's executive order designed to roll back electric vehicles incentives include:
- Instructing federal agencies to halt distribution of funds allocted for EV development
- Canceling Biden's executive order that strived for 50% of new vehicle sales to be electrict by 2030
- Removing regulatory barriers to gasoline-powered vehicles
- Halting federal funding for charging stations and battery manufacturing plants
It should be noted that executive orders do have limitations. Some policy experts have suggested that it would be difficult to eliminate embedded EV funding due to exiting legislation and other binding agreements.
As a result, the order could face legal challenges.
Elon Musk?
Interestingly, Tesla, the leading EV manufacturer in the U.S., seems to support this potential change.
According to the Reuters report, Tesla representatives have expressed support for ending the subsidy to Trump's transition committee. This may seem counterintuitive, but it aligns with CEO Elon Musk's previous statements.
- Musk, who heads Trump's Department of Government Efficiency, has argued that removing the tax credit would have a minimal impact on Tesla while potentially devastating its competitors.
- This perspective stems from Tesla's established market dominance and ability to produce EVs at a lower cost than many of its rivals.
Some say Musk's support for ending the tax credit reportedly has several moving parts. For example, Tesla has already exhausted its credit allocation under previous programs. So, the company might believe it can maintain its competitive edge without government incentives.
Meanwhile, companies that have invested heavily in EV production are reportedly watching the developments.
Manufacturers like Ford, General Motors, and Rivian have tailored their strategies to take advantage of the tax credits. Removing these incentives could impact their market positioning.
Recently, Reuters reported that an alliance of automakers, including General Motors, Toyota Motor Corporation, and Volkswagen, in a letter, urged then President-elect Donald Trump to maintain electric vehicle incentives and support the advancement of self-driving technology.
New bills target electric vehicles
In February, two Republican senators reintroduced bills involving EV incentives and costs.
Sen. John Barrasso (R-Wyo.), the Republican whip, proposed the Eliminating Lavish Incentives to Electric (ELITE) Vehicles Act (S. 541). The bill would:
- Repeal the $7,500 tax credit for new EV purchases
- End the $4,000 tax credit for used EVs
- Eliminate federal incentives for EV charging infrastructure
- Close the "leasing loophole" that allowed certain taxpayers and foreign entities to evade restrictions on EV incentives
If passed, those changes would take effect 30 days after the bill is signed into law.
“Repealing these reckless tax credits from the Biden administration once and for all will stop Washington from giving handouts to our adversaries and high-income individuals. Wyoming families should not foot the bill for expensive electric cars they don’t want and can’t afford,” Barrasso said in a release regarding the bill.
Simultaneously, Sen. Deb Fischer (R-Neb.) reintroduced a separate bill that would impose a new $1,000 fee on EV purchases at the point of sale. The Fair SHARE Act fee is designed to roughly match the federal fuel taxes paid by gasoline-powered vehicle owners over 10 years.
In a release, Fischer explained the rationale behind the fee, stating, “EVs can weigh up to three times as much as gas-powered cars, creating more wear and tear on our roads and bridges. It’s only fair that they pay into the Highway Trust Fund just like other cars do.”
The senators argue these proposals would create a more equitable system between electric and conventional vehicle owners.
California EV rebate?
Adding to the debate, California Gov. Gavin Newsom announced in November that if the Trump administration eliminates the federal EV tax credit, the Golden State would step in to provide rebates for EV purchases.
"We will intervene if the Trump administration eliminates the federal tax credit, doubling down on our commitment to clean air and green jobs in California, Newsom said in a statement. "We’re not turning back on a clean transportation future — we’re going to make it more affordable for people to drive vehicles that don’t pollute," Newsom added.
(California leads the U.S. in zero-emission vehicle adoption, with more than 2 million vehicles sold according to state data.)
The proposed rebate program would reportedly revive a prior successful rebate program in the state.
It's worth noting that Trump's Jan. 21 executive order would potentially revoke California's ability to set stricter air quality standards than federal regulations.
Other clean energy credits at risk?
While the Trump administration's current focus appears to be on the EV credit and closing the so-called "EV lease tax credit loophole," questions remain about whether other clean energy tax credits might also be on the chopping block.
For example, the IRA includes other popular incentives like the EV charger tax credit and others for clean energy home improvements like solar panels. As Kiplinger has reported, the IRS has paid billions in tax credits to taxpayers claiming the solar panel tax credit.
The EV tax credit: Bottom line
Repealing the EV tax credit would require congressional approval, likely as part of a larger tax reform package. This means that the tax credit's fate isn't yet sealed and will probably be a point of contention in ongoing legislative debates on Capitol Hill.
The coming months (and year) will be crucial for tax policy. So stay tuned and consider leveraging clean energy tax credits sooner rather than later.
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