Update August 2, 2021: The US Senate passed a 2,700 page, $1 trillion bipartisan infrastructure bill that would provide $7.5 billion for building new EV charging stations. However, the bill makes no mention of EV tax credits, so we must wait and see if the Senate will pass the May 2021 draft of the Clean Energy for America Act (discussed in this article). Or, the Senate may draft a separate spending bill later this year that would include EV tax credits.
On May 27, 2021, a draft of the Clean Energy for America Act that was introduced by Democratic Senator Ron Wyden moved out of the Senate Finance Committee. It modifies 26 U.S. Code § 30D - New qualified plug-in electric drive motor vehicles.
Ten Point Summary of the Clean Energy for America Act (section II.B.3)
1. Eliminates the 200,000 cap on cars eligible for tax credits for cars bought after May 24, 2021.
As of now, only GM and Tesla have reached 200,000 EVs produced. GM and Tesla were thus no longer eligible for the EV tax credit, so both companies stand to benefit.
This cap is eliminated retroactively for vehicles sold after May 24, 2021 (Chairman's Mark, p. 30). This means that any cars sold by GM and Tesla after May 24, 2021 will be eligible for up to a $7,500 tax credit. In sum: the 200,000 cap removal would be retroactive and applied to Tesla cars bought after May 24, 2021. A $7,500 tax credit would apply to 2021 taxes that are filed in 2022, so buyers would receive the credit when they file taxes in 2022.
2. Phase-out of the credit begins when EVs* account for more than 50% of annual sales of all new cars in the entire United States.
For perspective, in 2020, only 1.8% of new cars sold in the US were EVs. It could take 10-20+ years for EVs to reach 50% of all new car sales in the United States. President Biden has set a goal to reduce greenhouse gas emissions by 50% by 2030, so a nine-year time frame is an aggressive goal that this law would help.
(*footnote: the definition of “EVs” include “qualified fuel cell motor vehicles” and “qualified plug-in electric drive motor vehicles.” This, therefore, includes certain plug-in hybrids.)
3. The phase-out of the tax credit takes three years.
In the year that the previous requirement is met, the tax credit remains at 100% as well as the next full calendar year. In the next year, the credit is reduced by 25%, then reduced by 50% the next year, then the credit is eliminated the next year. For example, if the requirement is met in 2030, the credit will remain at 100% for 2030 and 2031, then reduced by 25% in 2032, then reduced by 50% in 2033, then eliminated in 2034.
4. The credit becomes a refundable tax credit.
Previously, the credit was non-refundable, meaning that a taxpayer could not claim the full credit if their tax bill did not equal or exceed the worth of the credit (up to $7,500). For perspective, in the IRS 2020 tax table, a person would have had to have the following taxable income to pay $7,500 or more in taxes:
In other words, those with taxable incomes below the amounts listed above did not receive the full EV tax credit under previous law. However, under the new bill, the EV credit would become fully refundable, regardless of income level.
5. Prevention of EV Credit Fraud.
There are two measures to deal with fraud: (1) taxpayers must provide the vehicle identification number (VIN) on their tax returns. (2) The IRS is given “mathematical error authority” over taxpayers who omit their VIN.
Senator Chuck Grassley introduced an amendment (p. 48) with additional measures to deal with fraud. The seller must report the following information to the IRS: (1) the purchaser’s name and Taxpayer Identification Number (TIN, usually social security number). (2) The VIN of the electric vehicle. (3) Verification that the car was purchased, not leased. (4) Verification that the car is new, not used. (5) The battery capacity of the vehicle. (6) A summary of the maximum credit the purchaser is eligible to claim. However, Grassley’s amendment was rejected.
6. Two additional credits worth up to $5,000 for EVs assembled in the US by unionized labor.
Democratic Senator of Michigan, Debbie Stabenow, introduced an amendment (p. 3) to provide two additional credits worth up to $5,000: (1) $2,500 for “qualifying vehicles, the final assembly of which is in the United States,” and (2) another $2,500 for “qualified vehicles assembled at facilities whose production workers are unionized.”
The maximum credit is therefore $12,500 if the EV’s final assembly was in the United States and was assembled by unionized labor.
7. The base (minimum) credit is increased from $2,500 to $5,000 in 2026.
Stabenow’s amendment also increased the base credit (namely, the minimum credit someone can claim) from $2,500 to $5,000 -- but only starting in 2026.
8. The Manufacturer’s Suggested Retail Price (MSRP) of the EV must be $80,000 or less in order to qualify for the credit.
This is to prevent high-earners purchasing luxury cars from benefiting and to encourage manufacturers to build cheaper EVs.
9. Chinese made EVs would be ineligible for the tax credit.
Senator John Cornyn, the Republican Senator from Texas, introduced an amendment (p. 55) that excluded Chinese produced EVs from the tax credit. In a rare move of bipartisanship, this amendment was passed unanimously.
10. The additional $2,500 credit would only apply to EVs bought on January 1, 2022 and after.
The enhanced $2,500-added tax credit is not a retroactive tax credit and will not apply to Tesla cars bought in 2021. However, the standard $7,500 tax credit is retroactive for any Tesla car bought after May 24, 2021 and before January 1, 2022. To summarize:
Tesla cars bought after May 24, 2021 would be retroactively eligible for a $7,500 tax credit on 2021 tax returns.
Tesla cars bought after December 31, 2021 would be eligible for a $10,000 tax credit (in most cases; see below) on 2022 tax returns.
Six Takeaways for Tesla:
1. With the 200,000 vehicle cap removed, Tesla cars sold after May 24, 2021 would be eligible for a $7,500 credit.
This is the standard credit of $7,500. Any of the enhanced credits for cars assembled in the United States and/or assembled by union labor would not take effect until 2022.
2. Most Tesla cars sold starting on January 1, 2022 would be eligible for a $10,000 credit.
This credit includes both the $7,500 main credit plus another $2,500 for Tesla cars whose final assembly was in the United States.
Tesla cars would not be eligible for an additional $2,500 credit because Tesla employees are not unionized.
We do not know how final assembly will be tracked, but as of Q1 2021, Tesla cars are manufactured at the following factories:
The Model 3 is assembled in California and in China. The Model Y is assembled in California and China, and will also be assembled in Berlin and Texas. Thus, the implication is that some Model 3 and Model Y cars assembled in Shanghai and Berlin would not be eligible for an additional $2,500 credit since they are not assembled in the United States. Thus, the credit would be capped at $7,500 for these cars. Perhaps Tesla can do a work around and do final assembly of all Model 3 and Model Y cars in the United States.
3. Because the extra $2,500 credit would not apply until 2022, the law could depress sales in 2021.
If someone waits until 2022 to buy a new Tesla, they would eligible for the additional $2,500 credit. This could have a negative effect upon Tesla in 2021 by causing some people to delay their purchase until 2022.
4. A fully loaded Model S, the Model S Plaid, and the Model X would not be eligible for the tax credit.
Since a qualifying EV cannot sell for more than $80,000, a fully loaded Model S, the Model S Plaid, and the Model X would be excluded. But all other Tesla cars (Model 3, Model Y, Cybertruck, base version of the Model S) would still be eligible for the tax credit.
5. The Ford F-150 Lightning truck would have a $2,500 edge over the Tesla Cybertruck instead of a $7,500 edge.
Under the old law, Ford could entice buyers with a $7,500 tax credit that the Tesla Cybertruck did not qualify for. However, if this bill passes, the Ford F-150 Lightning would be eligible for a $12,500 credit since Ford uses unionized labor and the F-150 Lightning will be manufactured in Michigan. The Tesla Cybertruck would qualify for a $10,000 credit since it will be manufactured in Texas, but Tesla does not use unionized labor. Under the old law, the Tesla Cybertruck does not qualify for a tax credit at all. Thus, the tax credit difference under the new law would be $2,500, instead of $7,500. This is a net win for Tesla.
The new law would also hurt the high-end Ford F-150 Lightning trucks which cost more than $80,000, because they would be ineligible for any tax credit at all. In contrast, under the old law, even the $90,000 Ford F-150 Lightning Platinum is eligible for a $7,500 credit.
6. The exclusion of Chinese-made EVs from the tax credit is a blow to Chinese EV companies such as NIO and Xpeng.
Many view NIO and other Chinese EV companies as a potential threat to Tesla, so Tesla stands to gain from this bill. However, it's unclear if these Chinese EV companies are even intending to prioritize the US market. Thus, the competition between Tesla and these Chinese EV companies may play out in China more than in the United States. But this law would further disincentivize Chinese EV companies from targeting US customers by handicapping their access to the US market. A Chinese-made EV would essentially cost $10,000 to $12,500 more than an American-made EV. This would be another win for Tesla and every other American EV car maker.
Summary: The Clean Energy Act for America would have a positive impact on Tesla by making most Tesla cars eligible for a $10,000 refundable tax credit and handicapping Chinese EVs from entering the US market. However, Tesla does not employ unionized labor, so Tesla would be ineligible for an additional $2,500 credit that companies such as Ford and GM would gain.