Even before Donald Trump considered a second term as president, his transition team was reportedly exploring the idea of eliminating the federal tax credit for electric vehicle (EV) purchases, which could be worth up to $7,500. According to a report by Reuters, this potential policy shift sent ripples throughout the automotive industry, prompting discussions about the future of clean energy initiatives in the U.S.
More recently, Trump signed an executive order, “Unleashing American Energy,” which could dismantle the EV incentive and related policies. In addition, two Republican senators have introduced separate legislation. One would eliminate the credit, while the other would impose a $1,000 fee at the time of purchase.
So, what would this mean if you’re considering buying an electric vehicle? Let’s take a closer look.
$7,500 EV Tax Credit in Doubt
The federal EV tax credit, a key part of President Biden’s Inflation Reduction Act (IRA), has been a popular incentive for consumers considering the switch to electric vehicles. Data suggests it has helped make EVs more affordable for a broader range of buyers.
However, the Trump administration appears prepared to dismantle this program as part of a broader tax reform package. Trump is focused on extending the Tax Cuts and Jobs Act (TCJA) from his first term. 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 express concern that eliminating the EV tax credit could hinder efforts to reduce carbon emissions and combat climate change. Environmental groups and industry analysts warn that the adoption rate of EVs might decrease without incentives, particularly in a market where many consumers remain price-sensitive about electric vehicles.
Conversely, proponents of ending the tax credit argue that the market should determine the success of EVs without government intervention. Their reasoning 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 vehicle incentives, include:
- Instructing federal agencies to halt the distribution of funds allocated for EV development
- Canceling Biden’s executive order, which had the goal of making 50% of new vehicle sales electric by 2030
- Removing regulatory barriers to gasoline-powered vehicles
- Halting federal funding for charging stations and battery manufacturing plants
It’s important to note that executive orders do have limitations. Some policy experts have suggested that it would be difficult to eliminate existing EV funding due to current legislation and other binding agreements; therefore, the order could face legal challenges.
Elon Musk?
Interestingly, Tesla, the leading EV manufacturer in the U.S., seems to support this potential change. Tesla representatives, according to the Reuters report, have expressed support for ending the subsidy to Trump’s transition committee. This could 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 minimal impact on Tesla while potentially damaging its competitors. This perspective stems from Tesla’s established market dominance and the ability to produce EVs at a lower cost than many of its rivals. Some observers say several factors may be at play regarding Musk’s support for ending the tax credit. For instance, 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 monitoring the developments. Manufacturers like Ford, General Motors, and Rivian have tailored their strategies to take advantage of the tax credits. The removal of these incentives could impact their market positioning. Recently, Reuters reported that an alliance of automakers, including General Motors, Toyota Motor Corporation, and Volkswagen, 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). This 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, these 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 that these proposals would create a fairer 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 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 currently focuses 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 future is not yet certain and will probably be part of the ongoing legislative debates on Capitol Hill.
The coming months (and year) will be crucial for tax policy. So stay informed, and consider leveraging clean energy tax credits sooner rather than later.
