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.
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.
Mother-daughter team installs battery packs in Chevrolet Volt electric cars
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.
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.
2019 Chevrolet Volt
Tesla is facing the same challenge with the Audi e-tron quattro about to go on sale in the spring. The e-tron is expected to sell for $75,795, about $10,000 less than a base Tesla Model X with similar range—and its buyers will be eligible for a full $7,500 federal tax credit at the time, vs just $3,750 for the Model X. The gap gets wider after June when the tax credit on the Model X drops to $1,875, and more when the Tesla credit ends in 2020.
Essentially, GM and Tesla are being assessed a penalty for being the first automakers to get serious about electric-car innovation by building up a battery supply chain when their tax credits get cut. Other automakers are reaping a reward for waiting for mass battery production, as they benefit from GM's and Tesla's investment.
As if that weren't enough, President Trump has picked a public fight with GM on Twitter and threatened to end all tax credits for the company's electric cars after GM announced in November that it would cancel the Volt as part of a series of layoffs and plant closings.
As it stands, Tesla and GM are the only automakers facing the tax-credit expiration in the next year. Nissan, which builds the Leaf at its factory in Smyrna, Tennessee, will follow in another year or two.
Automakers who import electric cars from China, Europe, and Korea, will continue to benefit from an advantage for the foreseeable future—at U.S. taxpayers' expense.
Democrats in Congress have introduced bills to extend the tax credits for another five years for all automakers—when even more advanced solid-state batteries are likely to come on the market—and to sunset them all simultaneously. Certainly, this will add to the cost of the program at a time when the U.S. is already running record deficits. The program as it is currently structured is estimated to cost $200 million over 10 years—a small fraction of the cost of tax deductions for oil exploration and refining.
2019 Audi e-tron first drive - Abu Dhabi UAE, December 2018
Republican bills aim to end the credit for all automakers.
Either proposal would do more to encourage manufacturing of advanced vehicles in the U.S. than the current structure.
Of the two options, the one that serve innovation more is for Congress to take action to reform and renew the plug-in vehicle tax credits, to continue the credit for the current market leaders and encourage more automakers to join in the transition to electric cars. Set the new credits to expire simultaneously for all automakers, and don't penalize domestic automakers for making early investments in innovation.
The tax credits have been controversial because most, so far, have gone to buyers wealthy enough to buy not just new cars, but new luxury models from Tesla. Several states have structured their tax credits to include a price cap to encourage a wider range of new-car buyers at more affordable levels to consider going electric.
This strikes us as a better way to limit costs of the program, since it applies equally to all automakers and could get more electric cars on the road. Tesla has already established that luxury buyers will pay a premium for electric cars.
As far as President Trump's policies go, the focus on ending tax credits makes it clear that denying climate change takes precedence over promoting manufacturing in the U.S.