(Last Updated December 20, 2021)
(1) The Infrastructure Investment and Jobs Act has passed, but it does not contain EV tax credits.
(2) The Build Back Better Act (H. R. 5376) passed the House of Representatives on November 19, which contains EV tax credits, as laid out below.
(3) However, the Build Back Better Act must now pass the Senate, where there is opposition from Senators Joe Manchin and Kyrsten Sinema.
In a December 19, 2021 press release, Senator Joe Manchin clarified his opposition to the Build Back Better Act, so any legislation on EV tax credits will be deferred at least until early 2022. And there is the possibility that Congress does not revisit EV tax credits even in 2022.
As of November 2021, there are two major initiatives moving through Congress that would impact EVs and Tesla in particular:
1. The $1 trillion Bipartisan Infrastructure Bill (or more specifically, The Bipartisan Infrastructure Investment and Jobs Act).
On August 10, 2021, The US Senate passed this 2,700 page, $1 trillion bipartisan infrastructure bill that would provide $7.5 billion for building new EV charging stations, as well as funding for roads, bridges, public transportation, clean water, broadband infrastructure, and cybersecurity. In a 50-50 tied Senate, it was notable that this bill passed with bipartisan support with a 69-30 vote. However, this bill does not deal with EV tax credits. The bill finally passed the House on November 5, 2021 and was signed into law by President Biden.
Since Tesla already has its own Supercharger Network, the Infrastructure Bill's $7.5 billion for building new EV charger stations does not really affect Tesla much.
2. A $3.5 trillion "Budget Reconciliation" for 2022 (pared down to about $2 trillion in October).
In order to side-step a Republican filibuster in the Senate (which would require 60 votes for legislation to pass), the Democrats are trying to use a workaround called "budget reconciliation" to pass a budget that only needs a majority (51 votes) to pass. With a 50-50 tie in the Senate, Vice President Kamala Harris can break the tie, but this also means that all 50 Democratic senators must support the reconciliation budget. This bill includes EV tax credits as discussed below, worth up to $12,500 for EVs built by union labor, while Tesla would qualify for a tax credit of $8,000 (in the House version) or $10,000 (in the Senate version).
Summary of what the two bills do for EVs: (1) The $1 trillion Bipartisan Infrastructure Bill provides $7.5 billion for building new EV charging stations. (2) The $3.5 trillion Budget Reconciliation provides EV tax credits worth up to $12,500 for union-built EVs, but only $8,000 (House version) or $10,000 (Senate version) for Tesla.
Background and Relevant Congressional Documents
On June 21, 2021, the Clean Energy for America Act was introduced by Democratic Senator Ron Wyden. It modifies 26 U.S. Code § 30D - New qualified plug-in electric drive motor vehicles. These EV tax credits were included in a $3.5 trillion budget blueprint that passed in the Senate on August 11.
On September 27, 2021, the House of Representatives introduced its own version of EV tax credits in its The Build Back Better Act, H.R. 5376 (pages 1868-1886), with some significant differences and additions when compared to the Senate version. This bill passed on November 19, 2021.
Twelve Point Summary of Potential EV Tax Credits (as of November 2021):
1. Eliminates the 200,000 cap on cars eligible for tax credits for cars bought after May 24, 2021 (only Senate version).
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 United States (Senate version), or after December 31, 2031 (House version).
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 (Senate version).
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 starting in 2022 (both Senate and House versions).
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.
Both the Senate and House versions would change the EV tax credit to become refundable starting in 2022. This is a major change that benefits the lower- and middle-class.
5. Prevention of EV Credit Fraud
In the House version, taxpayers must provide the vehicle identification number (VIN) on their tax returns and car manufacturers must supply VIN numbers to the Secretary of Transportation.
The Senate version (page 144) has far more reporting requirements to prevent fraud. EV sellers must produce a report to the buyer and the Secretary of Transportation that includes: (1) the taxpayer's name and Taxpayer Identification Number (TIN, usually social security number). (2) The VIN of the electric vehicle. (3) The battery capacity of the vehicle. (4) Verification that original use of the EV begins with the taxpayer. (5) A summary of the maximum credit the purchaser is eligible to claim. This requirement begins with EVs acquired after December 31, 2021.
6. Two additional credits worth up to $5,000 for EVs (one for unionized labor, the other for U.S. made).
This part of the law has two versions: (1) The Senate version. In May, Democratic Senator of Michigan, Debbie Stabenow, introduced an amendment (p. 3) to provide two additional credits worth up to $5,000: (a) $2,500 for “qualifying vehicles, the final assembly of which is in the United States,” and (b) another $2,500 for “qualified vehicles assembled at facilities whose production workers are unionized.” These amendments became part of the bill.
(2) The House version. In September, the additional credits were restructured by Democrats in the House of Representatives: (1) $500 for EVs that "are assembled by a manufacturer which utilizes not less than 50 percent domestic content in the component parts for final assembly, and . . . are powered by battery cells which are manufactured in the United States" (House Markup, p. 293) -- Tesla would qualify for this $500 credit. However, there is (2) an additional $4,500 (instead of an additional $2,500 in the Senate version) for EVs built by unionized labor, which would only benefit companies like Ford, GM, and Stellantis (parent of Chrysler), while placing Tesla at a disadvantage since Tesla does not employ unionized labor.
On September 12, Elon Musk drew attention to this unfair advantage:
Japanese carmakers Toyota and Honda have also criticized this unfair advantage.
Despite this disadvantage, Elon Musk boasts that Tesla has been able to sell vastly more EVs than any other company despite customers not receiving a tax credit. Musk has said that the entire Build Better Act should be not be passed, mainly because of budgetary concerns.
7. The base (minimum) credit is increased to $5,000 in 2026 (Senate version), or $4,000 in 2022 (House version).
As it stands now, the current EV tax credit gives a base amount of $2,500 for a four-wheel vehicle propelled by a battery at least a 4 kWh battery and is charged by an external source (i.e., plug-in). An additional $417 credit is given for each additional kWh above 4 kWh, with a maximum of $5,000. Thus, a vehicle with a 15 kWh battery qualifies for a maximum $7,500 credit.
Stabenow’s #1 amendment increased the base credit (namely, the minimum credit someone can claim) from $2,500 to $5,000 -- but only starting in 2026 for a U.S. made EV.
The House version (p. 283) set the base amount at $4,000 (instead of $2,500) for a vehicle with at least a 7 kWh battery (for 2022 and 2023), increasing to a 10 kWh battery (in 2024 and beyond).
Any EVs sold before January 1, 2027, with at least a 40 kWh battery would be eligible for an additional $3,500. Any EVs sold after December 31, 2026, would need at least a 50 kWh battery to qualify for an additional $3,500. These are much higher battery capacities needed to qualify for the full $7,500; right now, an EV only needs a 15 kWh battery to qualify for the full $7,500 credit.
8. The Manufacturer’s Suggested Retail Price (MSRP) of the EV must be $80,000 or less (Senate version); but $55,000 or less for sedans, $69,000 or less for SUVs, and $74,000 or less for trucks (House version), in order to qualify for the credit.
Originally, the maximum MSRP of an EV had to be $80,000 or less in the Senate version, but this was reduced to $55,000 (for sedans), $69,000 for SUVs, and $74,000 (for trucks) by Democrats in the House.
This cap is to prevent high-earners purchasing luxury cars from benefiting and to encourage manufacturers to build cheaper EVs.
9. The House version introduced a cap on adjusted gross income (AGI).
There was no income cap in the Senate version, but the House version introduced a $400,000 cap on AGI for individuals, $600,000 cap for head of household, and $800,000 cap for joint filers. The credit decreases by $200 for each $1,000 by which the taxpayer's AGI exceeds the above amounts.
10. Up to $2,500 tax credit for used EVs.
On July 29, Senator Diane Feinstein introduced a bill providing a $2,500 tax credit for used EVs, entitled the Affordable EVs for Working Families Act. The House included this proposal in their September 9 Markup of the Build Back Better Act (pp. 300-306).
The EV tax credit has traditionally only applied to new cars, but this bill provides up to $2,500 credit for used EVs with at least a 10 kWh battery, although the credit cannot exceed 30% of the sale price. And the buyer's adjusted gross income (AGI) has a cap at $75,000 for individuals, $112,500 for head of household, and $150,000 for joint filers. The credit decreases by $200 for each $1,000 by which the taxpayer's AGI exceeds the above amounts.
11. 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.
12. The additional, bonus credits would only apply to EVs bought on January 1, 2022 and after.
The additional credits are 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.
Summary of Potential Tax Credits for Tesla (more detail in next section):
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: In the House version, an $8,000 tax credit (excluding the Model 3 Performance, S, and X), but in the Senate version, a $10,000 tax credit (excluding the Model 3 Performance, S, and X) 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.
The renewal of an EV tax credit for Tesla provides new opportunities for growth
2. Most Tesla cars sold starting on January 1, 2022 would be eligible for an $8,000 or $10,000 credit.
This credit includes both the $7,500 main credit plus another $500 for Tesla cars with American-made batteries (House version), or another $2,500 (Senate version).
Tesla cars would not be eligible for an additional $4,500 credit (House version) or additional $2,500 credit (Senate version) because Tesla employees are not unionized.
The MSRP cap set by both the House ($55,000 for sedans, $69,000 for SUVs, and $74,000 for trucks) and Senate ($80,000) will have the same effect upon Tesla cars:
All three versions of the Cybertruck would qualify
All versions of the Model 3 would qualify, except the Model 3 Performance
All versions of the Model Y would qualify
All versions of the Model S and Model X would NOT qualify
3. A $2,500 credit for used EVs could help the used Tesla car market.
Since this credit equally applies to all EV car makers, this credit would help equally and not be unfairly biased against Tesla.
4. 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.
5. Tesla is clearly disadvantaged against companies with unionized labor like Ford and GM.
The House version gives unionized companies a $4,500 advantage, while the Senate version gives unionized companies a $2,500 advantage over Tesla.
We believe this to be unfair since Tesla leads the way in selling the most number of EVs and is poised to win the autonomous driving revolution.
6. However, Tesla may still outperform its competitors, which is why ETFs like $VCAR may benefit from the tax credit.
Tesla sold 500,000 EVs in 2020 in the U.S., while GM sold 26,552 EVs, and Ford sold 3(!) EVs (and an unknown number of hybrids). In the first six months of 2021, Ford sold 12,975 EVs, GM sold 20,288 EVs, while Tesla sold 386,161 EVs. The numbers are not even close, while Tesla continues to grow. We see potential upside with Tesla not only with sales growth, but with its imminent release of Full-Self Driving (FSD), hence our options based strategy in our conveniently packaged ETF $VCAR.
Summary: Pending EV tax credits would have a positive impact on Tesla by making most Tesla cars eligible for an $8,000 (House version) or $10,000 (Senate version) 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 $4,500 (House version), or $2,500 (Senate version) credit that companies such as Ford and GM would gain.
However, details could change...
The Senate must now take up the Build Back Better Act and if the Senate makes any changes, the law will undergo a process of Legislative Reconciliation between the Senate and House versions, where details could change, be cut out, or other things added in.