For several years, Federal EV Tax Credits have incentivized buyers to choose electric vehicles, but the expiration of EV tax credits is looming large.

New government administrations tend to change things, and that’s what’s happening with these tax credits. Initially, the federal tax credit for electric vehicles was expected to run through 2032, but now it’s set to expire toward the end of September of this year. This could dramatically impact the cost of electric vehicles and cause some shoppers to stick with a gas-powered model instead. This could have long-term impacts on the automotive industry.

How much is the current tax credit?

Electric vehicles can be purchased with up to $7,500 worth of tax credits for new models and $4,000 for used electric vehicles. There are certain rules that must be met for a vehicle and for purchaser to qualify for the credits, but that won’t matter much after September 30, 2025. This is the date by which these credits are scheduled to end, as it’s spelled out in the new bill that was just signed into law. Ending these tax credits might not change much for wealthy shoppers, but it will for those looking for lower prices and monthly payments.

Isn’t there a new credit for shoppers?

As you would expect from the current government administration, the attention goes to a new car loan interest rate tax deduction instead of the expiration of EV tax credits. This new deduction allows a person to write off up to $10,000 a year in interest paid on qualifying auto loans, but there are a few issues with this deduction. First, the person must pay at least that much in interest and owe at least that much to maximize the deduction. Also, there are several requirements that must be met in order to take the deduction. In other words, you must read the fine print. In fact, economists have noted that only one percent of car shoppers would be able to take advantage of the full benefit, which is the wealthy individuals who can afford a vehicle that requires them to pay that much in interest each year.

Huge differences between the credit and deduction

The first version of the electric vehicle tax credit allowed shoppers to take the credit when filing taxes, which is the same problem with this new deduction. Shoppers who didn’t owe at least $7,500 in federal taxes weren’t able to take the full deduction. Under the Inflation Reduction Act, things changed, and shoppers could take the credit at the dealership, which ultimately reduced the price of the vehicle by the amount of the tax credit. This was an immediate benefit to the shopper.

The deduction for interest on auto loans can only be taken if there is an auto loan and the shopper pays up to $10,000. The shopper would also need to owe up to $10,000 in federal taxes for this deduction to be maximized.

How will this change the automotive landscape?

The expiration of EV tax credits could change things in the electric vehicle world and might mean some shoppers will stick with gas-powered vehicles. Currently, gas-powered vehicles are more affordable than their electric-powered counterparts. If automakers want to sell EVs after September 30, they might need to lower prices to attract shoppers away from gas and diesel models. This could be troublesome for some companies, such as Rivian and Tesla, which could see significant declines in sales. Additionally, the development of electric vehicles and EV batteries could slow for models sold in the United States.

Another significant change to the EV market will remove the advantage American companies have in this area of the market. In order for EVs to qualify for the current tax credit, they must have their final assembly completed in North America to unlock any credits. In addition to this final assembly, the battery minerals must be sourced from the United States or countries with a free-trade agreement with the US. Without these requirements, the door is open for Chinese-made electric vehicles to be sold in the United States, which seems to go against everything the current administration desires.

Air pollution could increase, again

One of the most significant reasons for electric vehicle development is the reduction of air pollution. If shoppers who were expecting to buy EVs in the future suddenly stick with gas or diesel-powered vehicles, and organizations like CARB aren’t allowed to implement improved air-quality standards, air pollution could increase, back to smog-filled levels that were faced in many large cities. Polluted air contributes to breathing issues for many Americans.

The expiration of EV tax credits might not be noticed by most drivers, but the changes in the automotive landscape will certainly be noticeable and could have long-term impacts on the atmosphere.