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Electric Vehicles Expected to Cost More as Tax Credits Run Out

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【Summary】Think electric cars from Tesla and General Motors cost a lot of money now? Prices are expected to increase in the near future as the $7,500 tax credits are set to run out before the end of 2018.

Original Vineeth Joel Patel    Aug 06, 2018 12:00 PM PT
Electric Vehicles Expected to Cost More as Tax Credits Run Out
author: Vineeth Joel Patel   

One of the major reasons why consumers continue to choose gasoline-powered cars over their electrified counterparts has to do with pricing. For the most part, the majority of electrified vehicles cost more than the average gas-powered car. The situation is even more pronounced when you try to get into an electric car that has a useable range.


The situation is poised to get worse as tax credits on popular electric vehicles and plug-in hybrids from Tesla and General Motors are set to come to an end by the closing of 2018. In other words, if you're on the fence about purchasing an electric car, now would be a good time to do so. 


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Now Is The Time To Buy An EV From Tesla or GM


"For now, if there's a plug-in out there that you like, get it while there is a tax credit," Chelsea Sexton, an industry analyst told Consumer Reports. "There's not a reason to delay; there's no super awesome thing around the corner that's worth waiting for."


At the moment, consumers that purchase an electric vehicle or a plug-in hybrid can get up to a $7,500 federal tax credit. But that only applies to cars from automakers that haven't sold more than 200,000 vehicles. As automakers reach that breaking point, the credits begin to phase out. 


According to Consumer Reports, Tesla surpassed the 200,000 mark last month. The majority of those sales probably came from the Model S and X, as the electric automaker is just getting past the rough patch it was having with the Model 3. General Motors told the outlet that the threshold would be met by the end of 2018. What that means for consumers is that the federal tax credit will be cut in half to $3,750 for General Motors in July 1, 2019 and January 1, 2019 for Tesla. 


Consumer Reports breaks the figure down even more. After January of 2019 for Tesla and July of 2019 for GM, consumers will be eligible for a $1,875 tax credit. A year after that, in 2020, the federal tax credits will be gone. 


For Tesla, that means consumers won't be able to get the tax credits on the Model S, X, and 3, the latter of which is the best-selling EV in the United States. When it comes to General Motors, the decreased tax credits will affect the Chevrolet Volt, Chevrolet Bolt, and Cadillac CT6 plug-in hybrid. 


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What The End Of Tax Credits Means


As we pointed out earlier, this is a good time as any to purchase an electrified vehicle from either Tesla or General Motors. While the timeline is worrying for consumers, it's also a predicament for Tesla, which still hasn't made the entry-level Model 3 available yet. Some don't believe the $35,000 Model 3 will ever exist, while others claim that Tesla is using the electric sedan as a crutch to survive.  


As Consumer Reports claims, the fact that the affordable Model 3 still isn't out yet presents a confusing time for consumers. A Tesla spokeswoman told the outlet that the automaker would sell the Model 3 with the standard battery within six to nine months, which is something that the brand has said before. 


While Tesla is obviously working hard on trying to bring the entry-level Model 3 to market, it's unlikely that the vehicle will come out before the automaker's tax credits run out. "I would imagine that most people truly waiting for that base model should not count on getting the tax credit – or at least no more than a quarter of it," said Sexton. 


General Motors didn't confirm when its tax credits would officially expire, but spokeswoman Kelly Amann told the outlet that "we anticipate reaching this level by the end of the year." 


Consumers that live in a state with their own specific tax credits will still be able to get those, but the overarching federal law doesn't allow for any wiggle room. The IRS, according to Consumer Reports, states that once an automaker reaches the 200,000 mark, the full tax credits remain for the rest of the quarter and for the following one. The phaseout begins once those quarters are complete. 


While this seems like bad news for Tesla and General Motors, it's the first time any automaker has reached the limit for the 200,000 car credit, which is something that's actually good news. "Both companies are in new, uncharted waters," said Jonna Hamilton, senior manager of government affairs in the clean vehicles program for the Union of Concerned Scientists. 


"Hopefully dealers – or in this case of Tesla, their reps – are letting folks know you need to buy it at this point or the credit will be this much less," stated Hamilton. "I imagine consumers who understand what's happening will modify their purchase decisions based on this." 


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What's Next For EVs And Tax Breaks?


The uncharged territory brings a lot of questions with it. Will automakers reduce the price of vehicles to make up for the loss of tax credits? Will consumers, which already aren't interested in EVs, continue to purchase cars from the two brands? Sexton apparently has an answer for one of the questions. 


"You might get a feisty one that does it for competitive reasons," said Sexton, "but it's not going to be the general approach." Sexton made that statement in regard to automakers lowering the prices of its electrified vehicles after the tax credits disappear. 


The way EV incentives work in the United States is a little confusing, as consumers need to have a high tax liability to claim the full $7,500 credit. And some plug-in hybrids don't even qualify for the entire rebate amount. As Consumer Reports claims, automakers and advocates of electric vehicles have been requesting changes to the current arrangement for some time. 


Mary Barra, CEO of General Motors, publicly argued in favor for expanding tax credits earlier this year, reports the outlet. Barra isn't the only one that feels like that. Representative Peter Welch (D-Vt.) introduced legislation that would lift the 200,000 cap for EVs for the next decade. Others, like Consumers Union, which is the advocacy division of Consumer Reports, believes that the tax incentive would be more effective if it were aimed at middle-class consumers. 


"EV incentives would be the most helpful if they were targeted towards the most affordable EVs and for buyers who couldn't buy the vehicles without them," said Shannon Baker-Branstetter, senior policy counsel for energy and environment at Consumers Union. "Some states are moving in this direction, but unfortunately, Congress is unlikely to reform the incentives for the better in the near-term." 


For everyone that's not on the EV train at the moment, technology is getting better everyday, which will gradually bring down the prices of electric vehicles in the upcoming years and increase range. But tax breaks are rapidly dwindling. 

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