That proposed tax plan would kill the $7,500 electric vehicle credit

The tax plan proposed by House Republicans has hiding in it the repeal of a $7,500 tax credit that has arguably been one of the main drivers of electric vehicle purchases. Removing the credit would almost certainly adversely affect sales of electric cars just as they are beginning to get affordable to the general public.

You can see the text of the proposed tax plan here; the relevant portion is under Section 1102:

REPEAL OF SECTION 30D. — In General.— Subpart B of part IV of subchapter A of chapter 1 is amended by striking section 30D (and by striking the item relating to such section in the table of sections for such subpart.

Quite clear, isn’t it! Section 30D is the part of the Internal Revenue Code that offers a credit to purchasers of qualifying electric cars. Assuming the credit has been used in the case of purchase of most electric cars, it has saved taxpayers around a billion dollars since it took effect in 2010.

One could argue that $7,500 isn’t going to make much difference when a fully loaded Model S pushes a hundred grand, but it has certainly helped those cars become competitive at the same prices as other luxury vehicles. And cheaper options like the Leaf would likely never have taken off if they sold for their full price of around $40K rather than being closer to $30K.

While the tax plan would eliminate the credit, it’s possible it might have run out of steam on its own within a year or two, at least for Tesla buyers. The full credit only applies to the first 200,000 qualifying electric vehicles from a given manufacturer, starting in 2010. Tesla has gone through more than 120,000 of those (again if we assume everyone claimed the credit), and plans to sell 10,000 cars a month would finish off its allotment with a quickness. (It would then enter a phase-out period with a partial credit over a period of months; this wouldn’t happen if the entire credit was eliminated.)

GM and Nissan are comparably far off from that 200,000 figure (though no doubt they wish they were closer to it), but with plans to push electrics hard over the next decade, it would definitely figure into their calculations.

Effectively raising the price of electric cars by $7,500 would, of course, chill sales. States have their own credits, but they’re smaller and may also be more short term. The federal credit is the big one and one that manufacturers could rely on when juggling pricing, trim and other factors.

Should the credit be eliminated and 50,000 people buy electric cars in this country next year, that will equate to $375 million in the coffers. Sounds nice, but if the point of the cuts is to get money back to taxpayers, and taxpayers were using this credit, it ends up being a net negative for them. And meanwhile, the electric car industry, specifically big investors like Tesla and GM, takes huge losses as sales plummet. The short-term gain turns into a long-term loss as American manufacturing suffers and companies stop investing in the next decade and starts tightening its belt.

At least, that’s one possible outcome. Perhaps this will be one of the many parts of the tax code that will be revised in the coming “knife fight,” as I heard the negotiations regarding the proposal referred to earlier today. You can be sure that the car industry has dedicated some of its immense resources to accomplishing this particular change.