Guest commentary: U.S. tax incentives will reshape EV industry landscape

This article was originally published HERE

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There’s little doubt the Inflation Reduction Act will have a seismic effect on the U.S. electric vehicle industry, but the dust hasn’t yet settled on the details that will determine the affordability of different makes and models now on the market.

Major players are already requesting tweaks and adjustments to the act. If enacted as written, the new law could have the unintended consequence of actually suppressing sales of North American EV manufacturers, because few, if any, can meet all aspects of the supply chain criteria in the language.

If this and other issues are addressed, however, a couple of basic trajectories will have been set that carry long-term implications on supply and demand.

  • First and perhaps most obvious is the clear effort by the act to support domestic EV manufacturing. Vehicles made outside North America do not qualify for new federal tax incentives.
  • The second is the effort to democratize demand. To attract Main Street buyers, the act sets vehicle price and consumer income limits to qualify for the tax incentives.

Putting these two trajectories into motion offers the potential to change the mix of offerings that move into the market and perhaps will better reflect the demand dynamics of the internal combustion engine market, where light trucks largely prevail.

The new legislation offers a second bite at the apple for some early EV makers in the U.S. For those such as Tesla that no longer qualify for previous tax incentives because they passed the original 200,000-unit sales cap, the act offers an incentive to introduce EVs at price points that will help less-affluent buyers take advantage of income threshold-based tax credits. It opens the door for established EV players to continue capturing market share for cars priced below $55,000, or pickups and SUVs priced less than $80,000.

Prospects for mass-market EVs such as the Chevy Bolt, which ranks among the top 10 in J.D. Power’s August Electric Vehicle Consideration Pulse Survey, will look brighter. In July, Chevy announced a nearly $6,000 price cut for the 2023 model. When coupled with the tax credit, customers meeting the income criteria could stand to realize more than $13,000 in savings. And, starting in 2024, the credit will be realized at point of sale, putting that money immediately back into consumers’ pockets.

The short- and long-term effects of the act cannot be understated — especially in a shifting EV landscape where current standings are being disrupted by adoption drivers such as affordability and the availability of mass-market pickups, crossovers and SUVs with mainstream appeal.

Income requirements for eligibility are also interesting. Buyers must make less than $150,000 if their tax filing status is single and make less than $300,000 if married and filing jointly.

This is a big deal.

The J.D. Power Electric Vehicle Consideration Pulse Survey found 26 percent of new-vehicle shoppers would likely consider buying or leasing an EV in the next 12 months, while more than 90 percent of those have household income thresholds below the specified limits, making them eligible to receive the tax credit.

Targeting this income bracket will likely stimulate demand for mass-market vehicles because incentives matter more to those earning less. J.D. Power’s 2022 Electric Vehicle Experience Ownership Study finds that while 21 percent of premium vehicle owners cite tax credits or incentives as a fundamental reason for purchase, that number nearly triples to 58 percent for mass-market buyers.

Where dealerships do business, along with the demographic makeup of the communities they serve, will be a major factor in whether the provisions of the act enhance the ability to move EVs, because, unlike internal combustion-powered vehicles, total cost of ownership for EVs varies dramatically from one part of the country to another.

In New Jersey, EV purchases carry zero state sales tax, while registration fees in Georgia are higher than those for internal combustion vehicles. Also, different communities offer different utility incentives, including rebates for home-charger installations.

Communicating specific financial drivers is imperative to increasing EV adoption. It’s important for consumers to understand the details — including how and when to charge their vehicle based on the varying cost of electricity throughout the day — as well as what pricing incentives they can expect. It all adds up to a complicated equation for prospective EV buyers.

Dealerships and automakers have to develop new tools to capture and interpret essential and constantly changing cost-of-ownership variables in a manner that is accessible and understandable to consumers considering investments in EVs across specific markets.

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