President Trump’s 2020 budget seeks to eliminate tax credits for electric vehicles.
Many experts assert that electric cars should play a crucial role in fighting global warming and transitioning the world to a sustainable energy future.
To help speed this transition, the U.S. Congress established a tax credit system in 2009 to encourage consumers to switch to electric cars. But President Donald J. Trump’s 2020 budget proposal, released in March, aims to scrap these tax credits. Advocates of electric cars worry that such a decision could slow or stall the shift to electrified transportation.
Electric cars offer various advantages over internal combustion engine vehicles, but most proponents of the technology see the environmental benefits as the strongest selling point.
Because electric cars do not burn any fuel, they do not emit local pollutants from a tailpipe like a conventional car, resulting in cleaner air.
In terms of efficiency, electric cars use energy three times more efficiently than internal combustion engines. According to the U.S. Environmental Protection Agency, electric cars convert about 60 percent of their energy into forward motion, whereas internal combustion engine cars convert only 19 percent of their energy into forward motion.
Owners of electric cars also can charge their batteries from solar, wind, hydroelectric, nuclear, or other low-emissions energy sources. In addition, electric cars become greener over time as an increasing percentage of the world’s electricity comes from renewable sources. Even in cases where the electricity to charge electric car batteries comes from fossil fuels, and after considering the energy used to produce their batteries, electric cars have a lower environmental impact than cars with internal combustion engines.
These environmental gains all rely on an electric drivetrain, which itself relies on storing electrical energy in a battery. To match or beat the performance and range of conventional internal combustion engine vehicles—and therefore compete with them—automakers need sophisticated batteries with high energy densities.
With current technology, lithium-ion batteries fill the role best. But lithium-ion batteries do not come cheap. In a $35,000 Tesla Model 3, for example, the battery pack alone costs $7,500. This makes the battery the single most expensive component of the car and renders selling an electric car for less than $35,000 impossible with current technology.
Seeing the expense of electric cars as a hurdle to their adoption, the Obama Administration advocated a federal income tax credit that Congress eventually established in 2009. Under the Obama plan, cars qualify for a tax credit if they meet a certain minimum battery size, use an external source of power to recharge, have a gross vehicle weight under 14,000 pounds, and comply with emissions standards.
The tax credit starts at $2,500 and increases to a maximum of $7,500 as the amount of energy in the vehicle’s battery pack increases. The Obama Administration designed the credits as a temporary way to spur electric vehicle adoption. Once a car manufacturer sells more than 200,000 electric cars domestically, the tax credits for purchasers of electric cars from that manufacture enter a phaseout period but remain untouched for all other manufactures that have not yet hit the threshold. In the quarter after a manufacturer surpasses the 200,000-unit threshold, the maximum credit decreases by half for the following six months, then decreases by half again during months seven through twelve. One year after the threshold, the credits reduce to zero.
Tesla entered its phaseout period at the start of this year. Until the end of 2018, Tesla buyers qualified for the full $7,500 tax credit. Beginning in January 2019 through June 2019, the tax credit halved to $3,750, and, from July 2019 to the end of this year, it will be $1,875. The credit will disappear entirely in 2020 for Tesla buyers.
General Motors also crossed the 200,000 car threshold in the first quarter of 2019 and began its phaseout period in April.
Consumers who purchase electric cars from Nissan, BMW, Jaguar, Honda, and all other manufacturers still currently qualify for the full tax credit. But they will not if lawmakers scrap the tax credit.
Despite calls from Tesla, General Motors, and Nissan to increase the threshold for when the tax credits begin their phaseout, the Trump Administration wants to eliminate the tax credits altogether.
The Trump Administration cited financial savings as its reason for wanting to eliminate the tax credit. According to the Administration, eliminating the tax credit would generate an additional $2.5 billion in tax revenue over the next decade. General Motors and others criticized the budget proposal, stating that the transition to a reduced emissions future requires the federal tax credits.
Commentators expect Congress to reject President Trump’s budget, so the tax credits may well continue for the near future. One member of Congress has called for modifying the tax law to increase the electric car cap above 200,000 units, although another member of Congress wants to repeal the tax credits altogether, just as President Trump advocates.
Whatever the outcome of the tax credits, the precipitous fall in battery prices could make the issue moot. Due to continual technological innovation in battery design and manufacturing, battery prices have fallen 80 percent since 2010. Analysts predict that by 2025 the price will fall another 50 percent. With reduced battery prices, manufacturers may be able to produce electric cars at prices attractive to consumers, with or without the federal tax credits.