EV Tax Credits Expire September 30: What It Means for the Market
Federal tax credits for electric vehicles (EVs) are in the spotlight as the Trump administration seeks to refocus the economy on traditionally powered vehicles and deliver on its campaign promise to end federal subsidies for electric vehicles. The credits, now set to end on Sept. 30, have existed since 2008 and allow for non-refundable tax credits of up to $7,500 for the purchase of clean vehicles.
While the EV tax credit has undergone changes throughout its lifetime, it has helped to offset the comparatively higher cost of EVs for consumers. One such recent change is the Biden administration’s Inflation Reduction Act, which introduced additional requirements to qualify for the credit. These include an MSRP (sticker price) cap of $55,000 for sedans and $80,000 for SUVs and larger vehicles, as well as strict requirements for battery sourcing and domestic assembly. The restrictions do not apply to commercial vehicles. Additionally, the legislation added income caps of $300,000 for married couples filing jointly, $225,000 for heads of households and $150,000 for single filers to qualify for the credit. It also introduced a $4,000 tax credit for used EVs with a sales price of up to $25,000 and offered consumers the ability to claim their credit at the point of sale instead of waiting to claim it on their tax returns.
Furthermore, the Biden-era restrictions popularized what became dubbed the “leasing loophole.” Essentially, leased vehicles count as commercial since the financing banks technically own them, exempting them from MSRP and sourcing rules. The bank can claim the credit and pass its value to the consumer in the form of cash incentives, even if the vehicle would not otherwise qualify for an individual to claim the credit. The leasing loophole also shielded higher earners from the income cap. Before the Biden-era requirements, this loophole could be used by lower-income individuals or those without a tax liability to benefit from the non-refundable credit, without ever needing to claim it on their tax returns.
A sweeping energy and tax package passed in July, nicknamed by lawmakers the “One Big Beautiful Bill,” eliminated the tax credit for both new and used EVs, including commercial incentives, which allowed for the leasing loophole. While these changes were initially expected to take effect at the end of 2025, the phaseout was accelerated to Sept. 30 with the bill’s passage. In addition to eliminating the tax credit, the Trump administration chose not to renew the federal clean vehicle carpool decal program, another key incentive set to expire the same day, which had granted carpool lane access to solo EV drivers.
California, the nation’s largest EV market, home to roughly a third of EVs on the road, is considering offering its own incentives to backfill the tax credit that is set to expire. In November 2024, Governor Newsom publicly pledged to restart the state’s EV rebate program if the Trump administration eliminated the federal credit. California’s EV rebate program (CVRP), which closed in 2023, issued over $1.5 billion in rebates for electric vehicles over its 13-year lifetime. For comparison, analysts estimate that Californians will miss out on over $1.1 billion in EV tax credits in the year following the tax credit’s expiration. The state could tap its $4 billion-a-year cap-and-trade program, which taxes large polluters and gasoline, to revive EV rebates, but $1 billion is already earmarked for high-speed rail, with many other projects vying for the rest.
Since the passage of the “One Big Beautiful Bill,” automakers and dealerships have been trying to clear out their EV inventory, offering attractive deals before the tax credits end. Some automakers, such as Toyota, preemptively reduced the prices of their EVs. Others, such as Mercedes-Benz, immediately reacted to the bill’s passage by lowering the price on their vehicles by up to $15,000 before pausing U.S. production for most of its electric models.
The impending end of the credit and discounts from dealerships and automakers has led to a surge in EV sales. New EV sales rose 26.4% from June to July and were 19.7% higher year-over-year, then climbed another 14.1% in August, up 17.7% from a year earlier. Used EV sales increased dramatically, up 23.2% MoM and 40.0% YoY in July, and then 22.0% MoM and 59.0% YoY in August. Inventory tightened sharply, with new EV supply falling from 87 days in July to 62 in August, declines of over 30% month-over-month and nearly 50% year-over-year, marking the lowest level of 2025.
While the long-term impact on consumers of the credit ending remains unclear, it may be prudent to take advantage of the credits now while automakers and dealerships are offering additional incentives to clear out their inventory. This is especially true in states where legislators are unlikely to provide funding to backfill the credit. As consumers rush to take advantage of the current deals, experts predict a slowdown in the fourth quarter once the subsidies expire.
The federal tax credit’s end may reveal that the credit artificially inflated pricing in both new and used EV markets. Manufacturers may reduce the MSRP of their models as they historically have when their vehicles became ineligible for tax credits, such as when they hit their pre-Biden manufacturer limits for units sold or in response to Biden-era sourcing requirements. In the used market, however, the amount of such a bubble attributable to the used EV credit itself will likely be less than the amount of the credit. This accounts for the fact that not all individuals can currently access the credits equally, and pricing is more directly determined by demand. On the other hand, a decrease in price and an increase in new EV affordability could put downward pressure on the price of used EVs. However, any reductions in MSRP will likely not make new EVs more affordable than they were before the tax credit ended.
Car leases are likely to experience a significant impact from the tax credit ending. Lease payments are based on the difference between the sales price of a car and its residual value (the value the financing bank forecasts the vehicle will be worth at the end of the lease) plus interest, taxes and fees. In a lease, one finances only the depreciation portion of the car. The tax credit has an outsized positive impact on lease prices because the entire nominal amount of the tax credit is applied upfront towards financing only a percentage of the car’s cost, specifically the depreciation. This makes leases on EVs disproportionately cheaper than purchases. Once the tax credit disappears, any corresponding reduction in MSRP will be spread out over the entire price of the car, rather than being concentrated solely on depreciation, leading to significantly higher payments.
As the tax credit end date approaches, automakers and dealerships are offering some of the strongest deals seen in the EV market to date. The IRS extended its deadline to claim the credit, allowing buyers who enter into binding contracts before Sept. 30 to remain eligible even if delivery occurs later. With consumers accelerating purchases ahead of the cutoff and as automakers work to stave off the effects of tariffs, the current market represents a historically significant opportunity for potential EV buyers.
Photo Caption: An electric vehicle charging
Photo Credit: Unsplash/CHUTTERSNAP
