Incentives Watch: Federal Tax Reform Pumps the Brakes on Electric Car Incentives; States Zoom Ahead

On Nov. 2, the House unveiled its new tax bill, which in addition to the SALT deduction, corporate tax cuts, and pass-through entity provisions, deals with another issue surrounded by criticism on both the state and federal level: electric car incentives. While the House proposal would repeal the plug-in electric drive motor vehicle credit, some states are taking different steps.

Critics of electric car credits have pointed to inequality issues at the state and federal level. Recent studies have shown that they are predominately claimed by higher-income taxpayers. While the price of electric and hybrid cars has decreased, they still tend to cost more than normal cars, putting them out of reach for some people. Tax credits are created to financially incentivize people to do something they otherwise might not, and critics of electric car credits argue the main purchasers of the cars would likely buy them without the subsidies.

In addition, many of the incentive programs require that taxpayers lease or purchase a new vehicle, which disqualifies budget-conscious taxpayers purchasing used but environmentally-friendly cars. Although Colorado’s alternative fuel vehicle tax credits continue through 2022, the state disqualified used cars for the credit beginning this year.

The federal credit is designed to incentivize taxpayers to purchase an electric car. Under the incentive, eligible taxpayers can receive $2,500 to $7,500 per electric vehicle purchased depending on the size and battery capacity of the car. Under the House plan, the credit would be repealed effective for cars placed into service in taxable years beginning after Dec. 31, 2017.

Even without a repeal, the credit was not designed to continue indefinitely. The credit begins to phase out once manufacturers sell 200,000 qualified electric cars. After a manufacturer reaches that amount, taxpayers are only eligible for a decreased credit amount for cars purchased from that manufacturer. Current predictions are that Tesla, Nissan Motor Co., and General Motors would likely be subject to phase out soon even without the repeal.

Alternatively, some states have responded to these issues by increasing funding and adding further restrictions to eligibility to balance access to the incentives for their taxpayers.


On May 4, 2017, Maryland passed the Clean Cars Act of 2017, extending their current electric vehicle credit for three more years and increasing funding for the incentive. Although the credit is applied against the motor vehicle excise tax and not income taxes, it still offers eligible taxpayers the opportunity to receive up to $3,000, contingent on their car’s battery capacity. Unlike the federal credit, individuals in Maryland may only claim the credit for one vehicle. Residents can also receive a rebate for purchasing and installing equipment used to charge their cars.


Some states try to balance funding access for their programs by setting limits on the monetary value for eligible cars. Pennsylvania limits their rebates to alternative fuel vehicles valued under $50,000 for new vehicles. Taxpayers may also purchase used cars and still qualify if they live in certain counties or meet certain income levels. Although program funding is projected to be exhausted by the end of the year, the state already plans to review and potentially renew the program.


California leads the nation in air pollution but is also becoming a driving a force in increasing environmentally-friendly cars. California plans to have over 1.5 million zero-emission cars by 2025 and has put pressure on car manufacturers to help meet its goal. The state also offers rebates of up to $7,000 to taxpayers who purchase eligible cars. Their rebate program addresses the income equality concerns from critics of green car incentives. Originally, taxpayers who had gross annual incomes above a certain amount were ineligible for the credit, and lower-income taxpayers qualified for a higher rebate than middle-income taxpayers. But beginning this past June, only qualified low-income taxpayers may receive the rebate. However, funding availability is still an issue and taxpayers cannot fully rely on the rebate when calculating their new car budgets without factoring in the rebate waitlist.

Of course, not every state is focused on incentivizing their taxpayers to purchase greener cars. Michigan may contain a lot of car manufacturers, but it does not currently offer any state credits for electric cars. It is unclear if a repeal of the federal electric car credit could make states lacking their own credit less likely to create one in the future. But for states that already have a program, they appear to be continuing ahead.

Continue the discussion on the BBNA State Tax Group on LinkedIn: How should states respond to a potential repeal of the plug-in electric drive motor vehicle credit?

To learn more about Congress’s tax proposals, download Bloomberg Tax’s Roadmap to House and Senate Tax Reform Plans, available here.

Get a free trial to Bloomberg BNA Tax & Accounting's State Tax solution, a comprehensive research service that provides deep analysis and time-saving practice tools to help practitioners make well-informed decisions.