Some thoughts on how we can make this tax credit more useful.

Last December, I wrote a column about the proposed tax credits for electric vehicles (EV) in President Joe Biden’s Build Back Better (BBB) proposal. It was a good start although I thought it could have done more if it wanted to wean more people away from gas-powered cars and into EVs.

Since then, Russia invaded Ukraine, which has resulted in a surge in gasoline prices. As a result, some people are considering purchasing alternative-fuel vehicles. The problem is that since demand for EVs have increased, in addition to supply chain issues, deals are hard to find. Also, tax credits for some of the more popular EVs have expired.

Today, it looks like Biden’s BBB plan will not become reality as people are now focused more on Ukraine and alopecia. Now that Americans and others in the world are considering EVs and seem to have the money to buy reasonably priced ones, it is a good time to revisit alternative-fuel tax credits. I’ll use the provisions from the BBB as a starting point, but the overall goal should be to get more people into alternative-fuel vehicles as quickly as possible.

First, the tax credit should be increased to $12,500, just like in the BBB plan. But the credit should be available to all electric and alternative-fuel vehicles regardless of where they were manufactured or whether they were made by union members. The BBB plan reduces the credit to $8,000 for cars not made by unions. It also eliminates the credit for cars not made in the U.S. starting in 2027. This was criticized for being protectionist and political pandering.

Second, the tax credit should have no price or income restrictions. The BBB plan would eliminate the credit for passenger cars that cost more than $55,000 and for vans, SUVs, and trucks that cost more than $80,000. Also, individuals reporting adjusted gross income of more than $250,000 or joint filers reporting more than $500,000 are ineligible for the credit. While this would appear to benefit the wealthy who might not need the credit, they are also the early adopters of the technology. The Tesla Model S was targeted to the wealthy as a technologically advanced luxury car.

Third, there should be a larger tax credit for the purchase of alternative-fuel chargers. Some people were reluctant to purchase EVs because they could not afford the advanced equipment that could charge their cars quickly. Before 2022, there was a federal tax credit for the purchase of chargers which was either the smaller of 30% of the cost or $1,000 if purchased for personal use or $30,000 if purchased for business use. Since that credit expired just this year, it should be renewed but also increased to incentivize households to purchase alternative-energy cars. For business properties, the credit will pay for itself as installing EV chargers is likely to raise property values. When the properties are later sold (presumably at a profit), the cost can be recouped through capital gains taxes.

Fourth, to be eligible for the credit, the car must be sold at the manufacturer’s suggested retail price (MSRP). In addition, the manufacturer cannot use the credit to artificially raise the car’s MSRP. Any increase must be subject to government approval, which will only consider reasonable inflation costs and the car’s profitability. This will prevent manufacturers and dealers from using the credit to inflate the price of the car.

Finally, the tax credit should end after a few years, particularly if the tax credit ends up being particularly generous. If the tax credit is permanent, it will cost the government money and could drive up the cost of the car. Also, people today seem to be receptive to the fear of missing out. So if the credit is permanent, people are not likely to take it seriously. They are more likely to take advantage of it if they are given a limited time. Due to supply chain issues and startup companies not yet having full production capacity, it may take months or years after ordering before a consumer can take delivery of their car. To alleviate this, the purchasers should be eligible for the credit so long as they make a deposit for the purchase of the car before the credit expires.

With people upset over the record-high gas prices and the connection to countries run by dictators, they are seriously considering purchasing EVs in the future. This is a crisis that should not go to waste. The federal and state governments should take this opportunity to provide generous tax incentives to purchase alternative fuel cars and install charging equipment in their homes or businesses. By limiting the time to take advantage of the credits, people will move quickly before the next crisis becomes front page news.

Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at [email protected]. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.

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