Will Loss of Tax Credits Crash the EV Market?

Federal tax credits for plug-in vehicles are likely to disappear in the next few years, possibly signaling a rough road ahead for the electric car.

Loss of credits could damage the sales of the new breed of mainstream electric vehicles, such as the Tesla Model 3 and Chevrolet Bolt. And it could put pressure on automakers to subsidize a technology that’s mandated by law but has been decidedly unprofitable up to now.

“It’s going to hurt the manufacturers more than it’s going to hurt the market,” Sam Abuelsamid, research analyst for Navigant Research, told Design News.”They’re going to have to find a way to sell those vehicles.”

Industry observers say the loss of the $7,500 federal tax is imminent. The federal government originally made the credits available to the first 200,000 customers of each manufacturer, and the biggest electric car producers are expected to reach that point in 2018 and 2019. The Trump Administration is considered unlikely to renew the credit program after it tapers off.

If that’s the case, observers say, the EV segment will be deeply damaged. Edmunds, an online car research firm, recently published an assessment of the situation, bluntly concluding, “Without these credits, this market is likely to crash.”

The core of Edmunds argument was the parallel effect of a similar incentive in the state of Georgia. Analysts said that the Georgia program created a market for EVs that wouldn’t have naturally existed. And when it was removed, sales of EVs, especially the Nissan Leaf, dipped. They concluded that the removal of the federal program would have a similar result.

That effect would be most sharply felt by the makers of the new breed of mainstream electric vehicles with starting price tags of less than $40,000, analysts said. One such vehicle, GM’s all-electric Chevy Bolt, is already experiencing lukewarm sales (approximately 1,000 per month, according to InsideEVs), even though the incentive program is still in existence. Observers say that it faces challenges because gas prices are still relatively low and consumers now favor SUVs. “The Bolt is an interesting car with some really fascinating attributes,” noted Brett Smith, a program director for the Center for Automotive Research. “But it’s a small car and an expensive car. Its sales tell us what the electric vehicle market is facing, especially if you take that $7,500 away.”

To be sure, some EVs are selling well. A case in point: Tesla’s Model S is said to be the best-selling luxury vehicle in the US. But the Model S may be more immune to the loss of incentives, because its starting price ($70,000) is higher, making the tax credit a smaller percentage of the overall cost. Moreover, Model S buyers tend to be wealthier. “You buy a Tesla for two reasons,” Smith told us. “One, it’s the coolest thing you can do and, two, you have the money to do it.” A tax credit is likely to be more important when Tesla’s moderately priced Model 3 hits the market later this year, Smith added.

Whether or not the tax credits disappear, automakers have little choice but to accept the situation, analysts said. California law calls for the percentage of manufacturers’ sales of EVs to climb to 15% by 2025, and those who fail to meet the mandates face penalties for non-compliance. Therefore, manufacturers are less likely to discontinue poor-selling EV models, and more likely to deal those electric cars at a loss. “Without government support, the onus will be on automakers to keep sales afloat – most likely with their own incentive programs at a detriment to their bottom lines,” Edmunds wrote in its assessment.

That’s especially expected to be the case for the current crop of electric cars, such as the Nissan Leaf, Ford Focus EV, BMW i3 and Volkswagen e-Golf. “Most of the vehicles out there now in the affordable end of the market are not particularly competitive on their own merit,” Abuelsamid told us. “If consumers had to pay full price for them, those vehicles would be a tough sell.”

That’s why analysts say the battery is still the key to the success for the electric vehicle market. Better batteries with higher energy densities and lower costs will ultimately enable automakers to offer smaller price tags and greater all-electric ranges. The question – as it has been for more than two decades – is when that will happen.

“The loss of the incentives is going to hurt right now, until we start to see more affordable EVs coming to the market,” Abuelsamid said. “But the market will definitely recover. Manufacturers just have to create products that can sell on their own merit, regardless of the tax incentives.”

Senior technical editor Chuck Murray has been writing about technology for 33 years. He joined Design News in 1987, and has covered electronics, automation, fluid power, and autos.