Drivers across the U.S. have good reason to watch the negotiations over the Build Back Better Act, the latest version of which contains substantial tax breaks for owners of electric and plug-in hybrid vehicles.
The incentives go up as high as $12,500 and, perhaps equally important, could greatly simplify the process of getting an income tax credit for buying a car. The bill also would go a long way toward putting some electric vehicles on level ground with gas-powered cars on price. Experts say that could spur wider adoption of EVs — a key element of President Joe Biden’s plan to decarbonize the transportation sector.
While Democratic lawmakers continue to negotiate the $1.75 trillion measure, here’s what the latest version of the bill would provide EV owners:
- A credit of up to $7,500 for an electric or plug-in hybrid vehicle, defined as a car with a battery capacity of at least 40 kilowatt-hours and a gas tank, if any, under 2.5 gallons.
An additional $500 credit for a car with a battery pack made in the U.S.
An additional $4,500 credit for cars assembled at a unionized U.S. plant. (Currently only plants owned by GM, Ford and Stellantis qualify.)
Starting in 2027, only cars assembled in the U.S. that have. a battery of at least 50 kWH would qualify for the base $7,500 credit.
Notably, the credit can also be claimed by car dealers on taxpayers’ behalf, allowing car sellers to build the tax break into their sticker prices. And it’s refundable, meaning that taxpayers can qualify for it even if they have no tax liability — an improvement on current tax incentives for green cars.
Tax credit for used cars and two-wheelers
The Build Back Better Act for the first time also would makes used cars eligible for a tax credit, with EV buyers netting up to $4,000 for buying a used electric or plug-in hybrid vehicle. (Either the buyer or the seller of the used car can apply for the credit.)
The bill also contains a credit for electric motorcycles or three-wheeled vehicles, up to $7,500 or half the machine’s price. There is also a credit for fuel-cell vehicles.
Price and income limits
To qualify for tax credits under the BBB, EVs need to fall under a price limit. Vans, sports utility vehicles or pickup trucks need to be under $80,000 to be eligible for the credit; for all other cars, the price limit is $55,000. That means luxury EVs like the Porsche Taycam or the forthcoming electric Hummer wouldn’t qualify for the credit.
Consumers shouldn’t worry too much about the final numbers because carmakers will likely price their cars to qualify, said Mike Fiske, an analyst at IHS Markit.
“We know that given the history of incentives and pricing, [manufacturers] will play to these very strongly. If the limit is $80,000, they will offer something at or below $80,000 to qualify,” he said.
“We’ll definitely see any number of options that are at or near those MSRP limitations, whether they change or not,” Fiske added.
There’s also an income limit for taxpayers to receive the credit: $500,000 for married couples or $250,000 for single people. These limits are intended to direct the EV credit more toward middle- and working-class people, said Mike Fiske, an analyst at IHS Markit.
Geared toward the future
Very few electric cars on the market today would qualify for a full $12,500 credit. One of them is the Chevy Bolt, which is assembled in Michigan’s Orion Township and features batteries from a nearby LG facility. (Production of the Bolt is currently on hold while GM fixes issues with its older Bolt models, which were liable to catch fire.)
“As it stands today, there’s not a lot of vehicles [that qualify], but we know there are a lot more EVs that will be developed and released in the next few years,” Fiske said. “We’re right on the precipice of what could be coming.”
President Biden, who is visiting a GM plant on Wednesday to tout the green provisions in the Bipartisan Infrastructure Plan, has said he wants half of all new cars sold in the U.S. to be electric within a decade.
Many details of the BBB bill are still being negotiated, with the $4,500 union-made bonus in particular likely to be amended or cut, Fiske said. Non-union automakers and trade officials in Canada have objected to the proposal.
An upfront credit
For consumers, the credits in the Build Back Better Act are a big improvement on current federal incentives for EVs.
The current EV tax credit — a maximum of $7,500 — isn’t refundable. That means the most an individual can get from the credit is cancelling out other federal income taxes they owe, with no refund beyond that. And the credit doesn’t apply to the most popular EV car brands — Teslas or Chevys — something the proposed BBB legislation would change.
The proposed bill also makes it easier to get claim an EV credit by allowing dealers to collect it on customers’ behalf. That opens the door for car sellers to build in tax sweeteners into a vehicle’s sticker price, effectively giving drivers an upfront discount.
“This credit is at the point of purchas — it’s not a credit that you apply for,” said Kristin Dziczek, senior vice president of research at the Center for Automotive Research. “It’s going to come straight off a loan or the price of the vehicle.”
Closing the price gap
Today, the typical electric car is still pricier than conventional automobiles — about $10,000 more, according to Kelley Blue Book data. Over a car’s lifetime, an EV owner would save $4,600 on maintenance costs and thousands more on fuel costs, a Consumer Reports analysis found.
Still, the upfront costs are a big hurdle for many car buyers, who cite price as their main consideration. Buyers become more likely to consider EVs when their cost falls, according to the analysis.
Considering the price gap between EVs and gas vehicles, the tax credit could make electric vehicles much more affordable, Dziczek said. “The $7,500, $12,500, can do a lot of change there — it can make a difference,” she said.
The upfront nature of the credit is also key. Research from Cox Automotive notes that half of potential EV buyers don’t know they can get tax credits, or finding them confusing.
Incentives are key for EV adoption
Experts say that making EVs more affordable will be key to meet the Biden administration’s stated goals of electrifying the U.S. government’s vehicle fleet.
In the U.S., sales of plug-in electric vehicles have skyrocketed in recent years, but they’re still expected to make up just 4% of all car sales this year, according to Dziczek.
“There isn’t a market in the world that has significant EV adoption that doesn’t have a consumer incentive, some kind of government consumer incentive,” she said.
In Norway, which effectively made electric cars cheaper than the fossil-fuel variety through a series of aggressive tax incentives, 90% of all new cars sales are electric or hybrid.
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