The Plug-In Electric Vehicle Tax Credit

The Plug-In Electric Vehicle Tax Credit

Updated May 14, 2019
The Plug-In Electric Vehicle Tax Credit
Buyers of qualifying plug-in electric vehicles (EVs) may be
from a 250,000 vehicle limit to a 200,000 vehicle per
able to claim a federal income tax credit of up to $7,500.
manufacturer limit in the American Recovery and
The tax credit phases out once a vehicle manufacturer has
Reinvestment Act of 2009 (P.L. 111-5).
sold 200,000 qualifying vehicles. Tesla and GM have
reached this threshold, and credits for Tesla and GM
When Congress
vehicles will begin phasing out in 2019.
passed legislation
introducing tax
In the 116th Congress, legislation has been introduced that
credits for plug-in
would expand tax credits for EVs. Legislation has also been
EVs, these
introduced to repeal the provision. This In Focus provides
vehicles were
an overview of the plug-in EV tax credit and briefly
believed to be the
discusses relevant economic policy considerations.
“next generation”
of alternative-fuel
Tax Credit for Plug-In Electric Vehicles
vehicles. Providing incentives for these vehicles was
The primary federal tax incentive for plug-in electric
consistent with the broader goal of transforming the
vehicles is the Internal Revenue Code (IRC) Section 30D
transportation system to be cleaner, more fuel efficient, and
credit. The credit ranges from $2,500 to $7,500 per vehicle,
less reliant on petroleum. It was believed that tax credits for
depending on the vehicle’s battery capacity (and subject to
consumers would encourage acceptance of this emerging
the per manufacturer limit).
technology by making it more price competitive with
conventional vehicles. With more consumers wanting plug-
For individuals, the credit can only be used to offset a
in EVs, more manufacturers would make these vehicles
taxpayer’s tax liability in the current tax year (i.e., there is
commercially available, and plug-in EVs would become
no carryback or carry forward). The credit is nonrefundable,
fully integrated in the vehicles market.
meaning the amount of the credit cannot exceed a
taxpayer’s tax liability.
The EV credits followed credits for other alternative
technology vehicles that had been enacted in the Energy
For businesses, the tax credit attributable to depreciable
Policy Act of 2005 (P.L. 109-58). This legislation had
property used for business or investment purposes is treated
included tax credits for hybrid vehicles, along with other
as part of the general business credit. The general business
types of alternative fuel vehicles. Credits for hybrid
credit can be carried back one year or carried forward for
automobiles were not available after December 31, 2010.
up to 20 years.
Additionally, phaseout of hybrid vehicle tax credits was
triggered once manufacturer sales reached 60,000 vehicles.
Credits are generally claimed by the taxpayer purchasing
Toyota reached this threshold in the second quarter of 2006.
the vehicle for use. If the vehicle is purchased or leased by
Honda reached the threshold in the third quarter of 2007.
a tax-exempt organization, the seller of the vehicle may be
able to claim the credit so long as the seller discloses the
Economic Considerations
credit amount to the purchaser.
To evaluate the effectiveness of the credit for plug-in
electric vehicles, policymakers may consider (1) if the
The plug-in EV credit phases out once a vehicle
credit has been successful in increasing the number of EVs
manufacturer has sold 200,000 qualifying vehicles for use
in use; (2) who benefits from the credit; and (3) the cost of
in the United States. The credit begins to phase out in the
the credit relative to the credit’s benefits.
second quarter after the quarter in which the manufacturer
reaches the limit. For the first two quarters of the phase-out
Does the Tax Credit Lead to More EVs?
period, the credit is 50% of the full credit amount. For the
Some empirical evidence suggests that federal tax credits
second two quarters of the phase-out period, the credit is
are among the factors associated with higher plug-in EV
25% of the full credit amount. The credit is fully phased out
sales. Other factors that have been found to be associated
in the sixth quarter after the manufacturer reaches the limit.
with higher plug-in EV sales include access to charging
infrastructure and high-occupancy vehicle (HOV) lane
Legislative Background
exemptions.
The credit for plug-in EVs was established by the Energy
Improvement and Extension Act of 2008, enacted as
The effectiveness of a tax credit depends on how many
Division B of P.L. 110-343. As first enacted, the credit was
taxpayers buy a plug-in EV because of the tax credit.
to phase out once 250,000 credit-eligible vehicles were
Purchases that are motivated for other reasons, such as
sold. The plug-in EV phase-out threshold was changed
HOV-lane access or general desire for a high-end vehicle
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The Plug-In Electric Vehicle Tax Credit
that happens to be electric, might still qualify for federal tax
per-manufacturer cap. The bill also proposes allowing the
credits. For taxpayers who purchase for other reasons, tax
tax credit to be carried forward, or assigned by the taxpayer
credits are a windfall gain. They reduce federal revenue but
to the person who financed the purchase. This legislation
do not increase plug-in EV sales.
also proposes extending the tax credits for fuel cell vehicles
and alternative fuel infrastructure.
Who Claims the Tax Credit?
According to Joint Committee on Taxation (JCT) estimates,
Extending the credit for 10 years would benefit domestic
between FY2018 and FY2022, about half of the forgone
manufacturers whose tax credits have started phasing out.
revenue associated with the plug-in EV tax credit will be
The legislation has also been supported by some electric
for corporations claiming the credit (Figure 1). This could
utilities, who view EVs as a way to address slow growth in
be businesses purchasing EVs. This also could be instances
electricity demand. The CARS Act would address limits on
where sellers are claiming the credit for vehicles sold or
individuals’ ability to claim the credit by allowing a carry
leased to tax-exempt entities.
forward and by allowing the credit to be assigned to entities
financing purchases. A long-term extension of the plug-in
In 2016, 57,066 individual taxpayers claimed $375 million
EV tax credit would increase the tax expenditure associated
in plug-in EV tax credits. EV tax credits are
with this provision.
disproportionately claimed by higher-income taxpayers.
Most of the tax credits (78%) are claimed by filers with
Other legislation introduced in the 116th Congress, the
adjusted gross income (AGI) of $100,000 or more, and
Driving America Forward Act (S. 1094/H.R. 2256), would
those filers receive an even higher proportion (83%) of the
increase the per-manufacturer phase-out threshold and
amount of credits claimed. About 7% of credits claimed,
shorten the phase-out period. For manufacturers exceeding
and 8% of the total amount of credits, were on returns
the 200,000 vehicle threshold, a credit of up to $7,000
where the taxpayer’s AGI exceeded $1 million. Across all
would be made available for an additional 400,000 vehicles.
taxpayers, about 17% of returns filed have an AGI of
This bill would also modify the phase-out period, and
$100,000 or more. About 0.3% have an AGI of $1 million
extend the credit for qualified fuel cell motor vehicles
or more.
through December 31, 2028. Like the Electric CARS Act,
increasing the per-manufacturer cap would benefit domestic
Figure 1. Tax Expenditures for Plug-In EV Tax
manufacturers whose tax credits have started phasing out.
Credits, FY2011–FY2022
The Fairness for Every Driver Act (S. 343/H.R. 1027)
would repeal the plug-in EV credit. Additionally, this bill
proposes imposing an annual fee on alternative fuel
vehicles that would contribute to the Highway Trust Fund
(HTF). This fee might be viewed as a user fee for highway
use, and could help shore up the HTF. Imposing a fee on
plug-in EVs, however, would increase the cost of owning
these vehicles, potentially reducing the number of
consumers willing to substitute a plug-in EV for a
petroleum-fueled vehicle.
In the 115th Congress, there were proposals to modify the
tax credit for plug-in EVs by eliminating the per-

manufacturer cap, having the tax credit phase out after a
Source: Joint Committee on Taxation (JCT).
certain date instead. H.R. 7065/S. 3582 would have
Notes: * JCT estimated tax expenditures of less than $50 mil ion for
repealed the per-manufacturer limit, instead phasing out the
individuals in 2011 and 2012 and for corporations in 2014 and 2015.
credit in 2022. Removing the per-manufacturer cap would
Al tax expenditure figures are projections, and do not reflect the
likely benefit manufacturers of plug-in electric vehicles that
actual amount of tax credits claimed.
would otherwise have tax credits for their vehicles phase
out in the near term. However, with no credits available
How Much Does the Tax Credit Cost?
after 2022, the provision would not have provided a longer-
The JCT estimates that under current law tax expenditures,
term incentive to enter the plug-in electric vehicle market
or forgone revenue, for the plug-in EV tax credit will be
for manufacturers with a small or nonexistent presence.
$7.5 billion between FY2018 and FY2022 (Figure 1). From
FY2011 through FY2017, tax expenditures for the credit
In the 115th Congress, the House-passed version of the Tax
totaled $2.2 billion. Eliminating the per-manufacturer cap
Cuts and Jobs Act (H.R. 1) included a repeal of the plug-in
or otherwise expanding the credit would increase the tax
EV tax credit. The Senate’s version of the bill did not
expenditure estimate. Repealing the credit would reduce the
include a repeal, and the provision was not changed in the
tax expenditure.
2017 tax revision (P.L. 115-97).
Recent Legislative Proposals
Molly F. Sherlock, Specialist in Public Finance
In the 116th Congress, there have been proposals to expand,
as well as proposals to repeal, the plug-in EV tax credit.
IF11017
The Electric CARS Act of 2019 (S. 993/H.R. 2042) would
extend the credit through December 31, 2029, repealing the
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The Plug-In Electric Vehicle Tax Credit

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