California (Cars) Here We Come (Part II)
As readers of my earlier memo California (Cars) Here We Come (Part I) know, Maryland is adopting the Advanced Clean Cars II rule drafted in California. That rule will ban the sale of new gasoline-only powered cars in Maryland by 2035. That is still true but there have been further developments in this fast-moving field that warrant an update.
First, although the Maryland Commission on Climate Change recommended that the state adopt the regulations implementing the requirement during 2022, the state deferred the adoption until 2023. This has the impact of delaying the start of the phase-in while still requiring the same thresholds to be met. If the regulations had been issued during 2022, the initial requirement would have been for 35% of each manufacturer’s new cars sold must be zero emission or plugin hybrids by 2026. With the delay, the requirement will be 43% by 2027. The requirements of 68% by 2030 and 100% by 2035 have not changed.
To put this another way, the projected curve for electric vehicle adoption has not changed but the point at which penalties begin to accrue has been delayed by one year. See the chart below describing the projected adoption rate necessary to reach 100% by 2035.
The second major development is the adoption of significant federal incentives in the Federal Inflation Reduction Act (the Act). The Act provides a tax credit for certain electric vehicles purchased for personal use. The credit can be as high as $7,500. Although substantial, the credits are subject to several qualifications that may significantly reduce the people and vehicles that may qualify.
To qualify, the buyer first must have an adjusted gross income in the year of delivery or the year before below $300K (married, filing jointly), $225K (heads of households) or $150K (all others). The tax is nonrefundable, so the buyer must owe in taxes as much as the credit to receive the full benefit. In a sense, these are contradictory requirements. The buyer cannot make too much money but must owe a fairly large amount of taxes. There may be strategies available to deal with this (for example, converting a 401(k) to a Roth account) but this narrows availability.
The vehicles then must fall below certain price thresholds - $80K for SUVs and Pickups, $55K for other vehicles. The distinctions between what qualifies as an SUV versus “other vehicle” can be confusing and surprising.
For example, one of the most popular electric vehicles is the Tesla Model Y. Most people would consider it to be an SUV. However, it comes in two configurations. One has the standard five seats; the second configuration adds a small fold out seat suitable for children in the back and seats seven. According to the IRS, the seven-seat version is an SUV, and the five-seat is not.
Similarly, the Volkswagen ID.4 comes in a single and dual engine configuration. The two versions are identical from the outside, but one is classified as an SUV and the other is not. On the other hand, Cadillac SUVs, such as the Lyriq, are not considered SUVs by the IRS.
Given the different price thresholds, these definitions can determine whether a vehicle qualifies for incentives or not. However, manufacturers are responding by changing their configurations so that more vehicles will qualify for the credit. For example, Tesla has cut the price of many of their vehicles by 20% - partly to assure that more of the vehicles will qualify for the tax credit.
In addition, the Act requires the vehicle to have undergone final assembly in North America, weigh less than 14,000 pounds and have a battery capacity of at least 7 kilowatt hours. Some of these requirements will not be defined until Treasury issues new regulations in March. That could change the list of vehicles that qualify.
Potential buyers should start by reviewing the list of vehicles published by the IRS that are presumed to qualify.
To be sure, the IRS suggests that buyers input the vehicle information number (on the dashboard of the vehicle) into the US Department of Energy to confirm qualification.
Credits of up to $4,000 (or 30% of the price, whichever is less) are also available for used vehicles (at least two years old) that are purchased from a dealer and cost less than $25,000.
Finally, there are credits for commercial vehicles of as much as 30% of the basis in the vehicle up to $7,500 for vehicles weighting less than 14,000 pounds or as much as $40,000 for larger vehicles. Commercial sales may not be subject to some of the assembly requirements applicable to non-commercial sales. There is currently considerable controversy over exactly which sales will be considered commercial. For example, are fleet purchases of vehicles that are then leased out to third parties eligible?
To make the situation even more complex, the current lists and qualifications are preliminary and only apply until anticipated formal regulations are issued in March. At that time the list of qualifying vehicles and conditions may change.
The bottom line is that most Maryland residents will end up owning an electric car at some point during their lifetime. Currently, there are substantial incentives available if the buyer can navigate through the very restrictive qualifications, however, it appears unlikely that the federal incentives alone will meet the steep thresholds of the Advanced Clean Cars II rule.
For more information, contact Michael C. Powell
410-576-4175 • firstname.lastname@example.org
January 11, 2023