Industry Voices | Government Incentives’ Impact on EV Sales

Electric vehicles have evolved from niche products into mainstream contenders in the automotive market. This reasonably rapid transformation is not solely due to advancements in technology or a shift in consumer preferences, however.

A significant factor driving the adoption of EVs has been government incentives, particularly in the form of tax rebates. These financial incentives have played a crucial role in making EVs more accessible to the average buyer, but they have also introduced an unprecedented level of complexity and volatility into the market.

Government tax rebates for EVs began in 2008 as a “temporary measure” designed to jumpstart EV adoption and were altered and expanded under the Inflation Reduction Act (IRA), which has significantly boosted EV sales. These incentives, such as the $7,500 rebate for new EV purchases, have effectively lowered the upfront cost of these vehicles, making them more attractive to shoppers.

Yet, the complexity of these incentives is a continuing issue. Various codes tied to different vehicle types and eligibility criteria create confusion among consumers, dealers and manufacturers. Eligibility often depends on factors like vehicle price, battery composition, manufacturing origin and the buyer’s income, which has led to uncertainty in the market.

Despite this complexity, the incentives have been highly effective in driving sales. Through clever interpretation of the regulations (some would say loopholes), many vehicles that did not appear to qualify for the rebates have found ways to benefit.

Beyond that, auto manufacturers have stepped in to keep their vehicle prices competitive with vehicles that qualify for the tax credit. For example, when the Cadillac Lyriq temporarily lost eligibility for the federal rebate earlier this year, General Motors acted to maintain its competitiveness in transaction prices.

The Role of Various IRA Rebates

The IRA rebates cover a range of purchase scenarios, including incentives for used vehicles. They are highly publicized and have a direct effect on consumer behavior. Since the federal government has offered EV purchase-related tax incentives for a decade and a half, they are essentially built into the pricing landscape.

Because of this, the potential removal of these rebates that might come with a change of administration or Congress poses a significant risk to the market. If these incentives were to disappear suddenly, it would likely prompt automakers to lower the manufacturer's suggested retail price (MSRP) for most EVs so that the effective customer-facing transaction prices (CFTPs) would remain at about the same level they are now. Those manufacturers unwilling to lower their EV prices would almost certainly see fewer EV sales and significant consumer dissatisfaction.

A lesser-known but important factor is the rebates' ongoing effect on used-vehicle values. The availability of substantial rebates for new vehicles has depressed the value of used EVs, particularly in the early stages of ownership.

This dynamic is especially pronounced in the first 12 to 24 months of a vehicle’s life, as buyers choose to buy new vehicles that both qualify for the highest tax rebate and are often further incentivized by their manufacturers. As a result, residual value forecasts have been adjusted downward, and some models have seen double-digit declines in early-term residuals.

The Effect of Potential Rebate Removal

The potential removal of government rebates raises significant concerns for both buyers and manufacturers. Without these incentives, the even higher upfront cost of EVs would likely become a barrier to entry for many potential buyers. This could force manufacturers to either lower MSRPs or introduce their own incentives to maintain sales volumes.

Neither is a simple solution. Dropping MSRPs could influence residual values, further complicating the market dynamics. Piling on new manufacturer incentives isn’t a good alternative, either. It could lead to a perception among shoppers that the individual models are distressed.

The removal of rebates would also likely exacerbate the challenges already faced by the used-EV market. As CFTPs for new EVs decline with the combination of manufacturer incentives and federal income tax rebates, the value of used EVs, which do not benefit from the same level of tax rebates, would likely decline further.

This could lead to a situation in which EV residuals, already low in comparison to their internal-combustion-engine counterparts, plummet further. Among other things, this would make leasing more expensive, unless it is subsidized by the manufacturers.

The Infrastructure Challenge

While financial incentives have been effective in driving EV sales, they are not the only factor influencing adoption. Infrastructure remains a significant barrier, particularly for consumers who lack convenient charging options. Should non-Tesla owners gain widespread availability of Tesla Superchargers, as has been promised, it could significantly increase EV demand, because those facilities are more reliable and abundant than other options.

However, until EV charging is as quick and convenient as refueling a traditional vehicle, EV adoption is likely to remain limited despite tax incentives.

Implications of Government Incentives

The effect of government incentives on the EV market extends beyond immediate sales figures. These incentives have artificially boosted the attractiveness of new EVs, creating a price disparity between new and used vehicles. Not only do used EVs struggle to compete with new models that benefit from substantial rebates, but the complexity of tracking eligibility for used-vehicle rebates, particularly because each vehicle can only receive the rebate once, further complicates the market.

In addition to influencing consumer behavior, government incentives have also shaped the strategies of carmakers. Many manufacturers have adjusted their production volumes and pricing strategies based on the assumption that these incentives will continue. If government support were to be withdrawn, these companies would face significant financial strain as they attempt to maintain sales volumes without the benefit of rebates. This could lead to a reduction in vehicle volumes and force OEMs to lower MSRPs or risk increased consumer dissatisfaction.

Navigating the Future of the EV Market

Looking ahead, the potential removal of government rebates raises important questions about the sustainability of the current market dynamics. Without the incentives, the EV market could face significant disruptions: lower sales volumes, declining residual values and increased consumer dissatisfaction. At the same time, addressing the infrastructure challenges associated with EV adoption will be critical to ensuring the long-term viability of electric vehicles.

As the market continues to evolve, it will be important to strike a balance between maintaining affordability for consumers and ensuring the financial sustainability of manufacturers. Ultimately, the success of the EV market will depend on a combination of governmental policy, technological advancements and improvements in infrastructure.