Opinion: Expiring tax credits hurt U.S. automakers, favor imports

Tesla Model 3 all-wheel drive Performance rolls off a new assembly line in a temporary structure

President Trump campaigned on a promise to aid U.S. manufacturers and provide more incentives for them to produce products in the U.S.

Now the President, seemingly in opposition to that stance, has launched into a war of words with two of America’s largest automakers—its youngest and one of its oldest—over the tax credits that have allowed them to build advanced plug-in cars in the U.S.

It wasn’t supposed to be this way.

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The Plug-In Vehicle Tax Credit, conceived in Congress during the George W. Bush administration and implemented in the early years of the Obama administration, was meant to encourage automakers from any nation to sell more electric cars in the U.S.

The credit granted buyers of electric cars up to $7,500 back on their federal tax bills for buying a qualifying electric car. The point was to make electric cars as affordable as gas-powered models for consumers, while letting automakers charge a price that would cover the cost of building large, high-tech, lithium-ion batteries, which otherwise would have put electric cars out of reach for many consumers.

In an effort to level the playing field—an effort looking more and more misguided—and not leave the government paying these tax credits forever, the credits were nominally limited to the first 200,000 electric-car customers for each automaker. After that, the reasoning went, carmakers and their suppliers would have a chance to build up a supply-base for electric-car batteries, and economies of scale would bring prices down to something closer to parity with gas cars.

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That part is beginning to happen, as some of the latest electric models cost little if any more than their gas counterparts. 

After an automaker builds its 200,000th car, the tax credit begins to wind down. Up to six months later, it gets cut in half for six months, and is then halved again for another six months, until it ends entirely.

At the time the tax-credit structure was conceived, it wasn’t clear which automakers might be the first to make large investments in battery production and thus be first to lose federal tax credits. It’s now clear that the answer is Tesla and General Motors, the two domestic American car companies who have done the most to build, promote, and sell clean electric cars in the U.S. Nissan, which also made large, early investments in battery infrastructure, has not yet reached the threshold, and just sold its battery division to a Chinese power company.

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Other automakers, primarily imports such as Volkswagen, and Hyundai-Kia—along with Ford and Fiat Chrysler—will still benefit from being able to undercut the prices of comparable GM and Tesla models, while earning more from their sales.

The best example is the new Hyundai Kona Electric, which the Korean automaker priced to match the Chevy Bolt EV at $37,495 when it hits dealerships in January. For three months, the two models, with similar range ratings (a little longer for the Hyundai), will sell side-by-side, for an effective price of $29,995 for buyers who qualify for the full credit.

Starting April 1, when the tax credit for GM buyers drops to $3,750, GM will either have to drop the price on the Bolt EV an equivalent amount, or buyers will have to pay the difference—giving them 3,750 reasons to choose the import instead. GM decided to discontinue the slow-selling Volt rather than hurt sales with an even higher effective price once the tax credit expires, or lower its MSRP and sell the car at a bigger loss.

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