Overview of Recent Findings

In a recent report by the Institute for Energy Research (IER), titled Revenue Estimates for Repealing the Clean Vehicle Tax Credits (30D, 25E, and 45W), an analysis conducted by the EY’s Quantitative Economics and Statistics team sheds light on the fiscal impacts related to the Inflation Reduction Act (IRA) of 2022.

Concerns Regarding the Inflation Reduction Act Costs

The IRA has drawn increasing scrutiny, primarily due to its escalating projected costs. Initially estimated by the Congressional Budget Office (CBO) at approximately $370 billion over ten years, newer projections have soared. For instance, Goldman Sachs now estimates costs could reach $1.2 trillion, while the Cato Institute suggests an upper limit of $1.97 trillion by March 2024. A significant portion of these expenditures is attributed to tax credits aimed at promoting electric vehicle (EV) adoption.

Key Tax Credits Under the IRA

The IER report highlights three primary federal tax credits established under the IRA:

• New Clean Vehicle Credit (30D): A credit of up to $7,500 for purchasing new EVs, plug-in hybrids (PHEVs), and fuel cell vehicles (FCEVs). Eligibility requirements include specific sourcing conditions for critical minerals and battery components, as well as income caps ($300,000 for joint filers and $150,000 for individuals). Vehicle price limits are set at $80,000 for trucks and SUVs, and $55,000 for other passenger vehicles.
• Used Clean Vehicle Credit (25E): A maximum credit of $4,000 for used clean vehicles valued at $25,000 or less. This credit includes similar income restrictions and can be claimed only once every three years.
• Commercial Clean Vehicle Credit (45W): Aimed at businesses, this credit awards up to $7,500 for lighter vehicles and up to $40,000 for heavier commercial EVs. Leasing companies can also benefit from this incentive.

Potential Revenue Increases from Repealing Tax Credits

The IER report estimates that if these tax credits were repealed and the tax framework reverted to pre-IRA conditions, federal revenues could increase by roughly $300 billion over the period from 2026 to 2035, depending on various policy scenarios.

As debates intensify around fiscal policies, the future of the IRA and its financial implications for electric vehicle incentives are critical points of consideration for lawmakers, particularly in discussions surrounding the extension of the Tax Cuts and Jobs Act (TCJA).

Political Context and Implications

The IRA was enacted without the support of any Republican lawmakers, which implies that the tax credits associated with it may be an appealing source of revenue for extending the TCJA. This raises significant questions about the broader economic trajectory of the United States: Are government subsidies the best method for fostering innovation and choice, or would alternative policies that prioritize taxpayer empowerment and market-driven solutions be more effective?