Monday, May 1, 2023

About that $7,500 Federal EV Tax Credit...

I read a lot of articles about EVs (electric vehicles). The writers of these articles commonly assume that if a car  qualifies for the full $7,500 federal tax credit, the effective purchase price drops by that amount. A recent post by Inside EVs is typical:

The 2023 Volkswagen ID.4 is eligible for the full $7,500 federal tax credit. ... The 62-kWh battery version starts at an MSRP of $38,995 (+$1,295) DST, which effectively means $32,790. The 82-kWh battery version starts at an MSRP of $43,995 and is effectively priced at $37,790, while the AWD versions are $4,000 more expensive (effectively from $41,590).

Notice how the "effective" prices are $7,500 less than the MSRP plus the DST (destination charge). This is terribly misleading. To get the full $7,500, you have to owe at least $7,500 in federal income tax for the year you buy the car. If you don't, you get less than $7,500. The less you make, the less you get.

I used the SmartAsset Federal Income Tax Calculator to create a quick-and-dirty mapping from income to federal tax liability (and hence EV tax credit). These data are for a two-person married household taking the standard deduction and making no 401(k) or IRA contributions: 

You can see that for taxpayers fitting this profile and making under about $95,000, the $7,500 EV tax credit is a myth. For a couple making $55,000, the credit is less than half the full amount. For a couple getting by on $25,000, there's no tax credit at all.

$95,000 is higher than the median household income in 2021 for every state (as well as the District of Columbia) except Maryland. (The source for this appears to be the US Census Bureau, but I found the data at Statista. Credit Karma shows identical numbers.) I'm comparing apples and oranges a little by using a two-person married household for the $95,000 and a household of any type and size for the median incomes, but these are the values that are easy to find. For a broad-stroke picture, I think they suffice. If you have better statistics, please let me know.

The broad-stroke picture is that in every state except Maryland, the majority of two-person households would probably fail to qualify for the full $7,500 federal EV tax credit. Some articles on EVs mention that the full credit is available only to those who owe at least that much in federal income tax, but they generally make it sound like an edge case. The data above suggest that failing to qualify for the full credit is the rule, not the exception.

For completeness's sake, I'll note that the tax credit goes away for high-income taxpayers. For a married couple filing jointly, the credit vanishes when the couple's modified adjust gross income hits $300,000.


Lucas said...

Well said - I completely agree that the majority of media portrays EV tax credits in a misleadingly oversimplified manner. The credits are intended to incentivize purchase of cleaner vehicles, and while they're helpful to some extent, I think it'll take a lot more change before we see mass adoption. For one, EVs need to be affordably priced before any tax incentives. Hopefully as the focus shifts more towards this technology we'll see innovation bring costs down. But at least as important is convenience. I think a lot of potential EV buyers will be turned off to the prospect of switching to EV until they see charging as similarly convenient to getting gas. And for that to happen, there's a whole lot of charging infrastructure that needs to be built and maintained. I'm hopeful that this will take shape over time but I'm not going to expect to see any significant EV shift imminently.

One interesting tidbit about the tax credits that you may be aware of: they can also be used if you leave an EV, in which case the credit goes towards the lessor and can thus be used to lower the purchase price used in the lease calculation. And interestingly, the Inflation Reduction Act allows leases of private vehicles to qualify for the commercial tax credits which have almost none of the restrictions that the individual purchase credits (income cap, MSRP limit, domestic assembly requirement, etc). So if you're looking for an EV, I think it makes sense to consider leasing because you're more likely to actually benefit from the tax credit - no worrying about owing enough tax to get the full credit or waiting until you file taxes to actually get the credit. Obviously this doesn't magically democratize EV access for the masses - you still have to be able to afford to finance a new car - but I think it should be talked about more in discussions of the EV tax credits since it addresses many of their pitfalls.

Scott Meyers said...

@Lucas: You're correct about the leasing angle. I didn't mention it, because leasing is fundamentally different from buying, but for people who are willing to consider an option that doesn't result in them owning the car, it's an important option.

Your comment about buyers having to wait to get the tax credit until they file their taxes is on target, too. It means that even buyers who qualify for the full $7,500 have to wait months (typically) before getting it. On top of the income requirement, it's another way the federal EV tax credit effectively reduces the cost of EVs primarily for the well-to-do.

Lucas said...

@Scott Meyers Fair enough. Personally, I never considered leasing until I started looking into getting a cheap EV commuter for my wife 2 years ago. The fact that you're only committing to paying for a few years of depreciation, and you're locking that deprecation amount in at the outset, seemed advantageous given how rapidly EV technology is evolving. In my case it worked out because my wife and I got a great deal on a 2020 Hyundai IONIQ EV that had been sitting on the dealer lot for months - otherwise we would have stuck with her completely serviceable 2013 Camry.

On a separate note, I caught up on all of your previous EV-related blog posts, and I think they highlight one of the key shortcomings that EVs have compared to their gas counterparts: they're not yet viable "one car that does everything" solutions for most people. With today's EV offerings, you have to choose 2 of "affordable", "feature rich", and ">250 mile range", whereas there are plenty of ICE options that satisfy the first two. For the non-wealthy, I think an EV works best as a more dedicated commuter-type car, paired with a gas "go anywhere" car if necessary. That's what we did (I hung onto my Subaru Forester that I bought new in 2017), and so far it's worked out well for us. But I'm hopeful that as technology improves and manufacturing costs go down, we'll soon see EVs compete more closely with gas cars in the non-luxury space.

On a final note, I would be remiss if I didn't mention that your Effective C++ series of books were hugely formative during my early years as a software engineer and have continued to serve as great resources since then. They're the first materials I recommend to anyone wanting to learn good C++ practices, and I've encountered several veteran C++ engineers who also swear by them. Your contributions to the industry are immense and while I'm bummed to not have any new Effective C++ books to look forward to, your retirement is well-earned.

Scott Meyers said...

@Lucas: Thanks for your kind words about Effective C++. As regards EVs, I agree that there's a lot more to choose from if you're looking for a secondary car. For a primary car (which is what I have in mind), I'm less willing to make compromises, so the challenge is greater. Later this month I'll post about the EV landscape four years after I bought the ICE car that I would have liked to make an EV. There's been progress, but the pace remains frustratingly slow.

Lucas said...

@Scott Meyers Agreed that the progress has been slow up to this point. I look forward to reading that blog post!