Impact of Recent Legislation on U.S. Electric Vehicle Incentives

Overview

President Trump's recent bill has passed the Senate and includes the removal of several environmental protection measures, notably ending current federal rebates for electric vehicles (EVs).

As currently written, the $7,500 federal rebate for electric vehicles is set to expire at the end of September, rather than in 2032 as previously planned. This change ends a series of incentives that have existed in various forms since the George W. Bush administration.

The change applies not only to new consumer vehicles, such as the Kia EV9 or Volkswagen ID.Buzz, but also eliminates the $4,000 federal credit on used EVs. Additionally, rebates for commercial vehicles, including electric vans from companies like Rivian and Arrival, are also affected.

All of these initiatives were intended to reduce the environmental impact of the transportation sector, which accounts for 29 percent of total U.S. greenhouse gas emissions. While the environmental effects may not be immediately apparent, potential EV buyers will experience financial impacts sooner.

Proposed Annual EV Tax

Earlier versions of the bill included a proposed $250 annual fee for EV owners and a $100 fee for hybrid owners. This fee would have applied regardless of when the vehicle was purchased.

The proposed fee was intended to contribute to the Highway Trust Fund, which is primarily funded by an 18.4 cents per-gallon gasoline tax. This system is designed to ensure that drivers contribute to highway maintenance.

According to the Department of Energy, the average American drives 11,318 miles per year, resulting in approximately $100 annually in gasoline taxes. The proposed EV fee would have been more than double this amount. While electric vehicles and their batteries can increase road wear, the proposed fee was not proportional to this impact.

Lawmakers encountered challenges in implementing such a fee. Ohio Republican Senator Bernie Moreno stated, "There is no mechanism today for the federal government to collect an annual fee." As a result, this fee is not included in the current version of the bill.

Industry Impact

U.S. EV sales have not matched earlier growth projections but have continued to increase. In the first quarter of this year, EV sales rose by 10 percent, according to Cox Automotive, despite a decline in Tesla sales.

With the average cost of a new car in the U.S. at $48,799 and a new EV at $57,734, the $7,500 federal tax credit has played a significant role in reducing the price gap. If the bill passes, this incentive will end within a few months.

The impact of removing such incentives can be observed in other markets. For example, Germany's Climate and Transformation Fund provided €10 billion between 2016 and 2023, supporting the purchase of 2.1 million EVs. After the program ended, EV sales in Germany declined by 16.4 percent in the first half of 2024, while EV sales elsewhere in Europe grew by nearly 10 percent. However, German EV registrations increased by more than 40 percent in the first five months of this year, despite a decline in Tesla sales.

Brands and Charging Infrastructure

Manufacturers with lower-priced EVs, such as Hyundai, Kia, and Nissan, are likely to be most affected by the change. Buyers of premium brands, including Mercedes-Benz, BMW, and Porsche, may be less influenced by the loss of incentives. No vehicle manufacturers have endorsed the bill.

Organizations in the petrochemical industry, such as the American Petroleum Institute, Chevron, ConocoPhillips, and Coterra, have expressed support for the bill.

The bill also removes the Alternative Fuel Vehicle Refueling Property Credit, which covered up to 30 percent of the cost of EV charger installation. This credit encouraged businesses to install more chargers. Its removal may slow the expansion of charging infrastructure in the U.S.

Additional Provisions

Some critics of the federal credit program have argued that it was often used by higher-income buyers to reduce the cost of luxury EVs. The bill introduces a new tax deduction that may benefit a broader range of buyers.

If enacted, the bill would allow individuals with car or motorcycle loans to deduct up to $10,000 in interest per year on their taxes. This applies to vehicles of any propulsion type, provided they are for personal use, do not have a salvage title, and were assembled in the United States. The full deduction is available to individuals with an adjusted gross income (AGI) below $150,000, or $250,000 for married couples filing jointly.

Considerations for Buyers and Manufacturers

Potential EV buyers may wish to consider purchasing before the federal rebate expires, as additional dealer incentives may also end soon.

For manufacturers, there are limited immediate options to respond to these changes. The automotive industry is not structured for rapid adaptation to policy changes. Future success may depend on offering EVs that are competitively priced with internal combustion vehicles or provide sufficient value to justify higher costs.