Why States Need Electric Vehicle Incentives Now

U.S. sales of electric vehicles (EVs) are trending in a positive direction, yet new EVs remain out of reach for many low- and moderate-income (LMI) car buyers. That’s where state incentives play a critical role.

Let’s start with the good news.

EV sales are up

Even as new car sales fell in 2022, U.S. EV sales rose to 5.8% of all new vehicles sold, up from 3.2%, according to Kelly Blue Book. In California, the leading state for EVs, nearly 1 in 5 new cars sold was an EV last year (18.8%, up from 12.4% in 2021). Rounding out the top five states in total sales of battery electric vehicles and plug-in hybrids are Florida, New York, Texas and Washington.

But the goals are far higher

While the EV market is growing incrementally, many states have ambitious targets for transitioning to 100% EV sales to reduce air pollution that harms human health and contributes to climate change. California is setting the pace for greater adoption with regulations requiring that 100% of new passenger cars, trucks and SUVs sold in the state tbe zero emission by 2035. So far, 17 other states, constituting about 40% of the nation’s new car sales, have adopted all or part of California’s policy (as allowed under Section 177 of the Clean Air Act).

A key policy that is pushing California toward the goal line is its first-in-the-nation statewide EV incentive program, the Clean Vehicle Rebate Project, which has provided over 500,000 rebates for new EVs since 2010.

For other states, even leading ones, the goal of EVs making up 100% of new cars sold in the near future is still a stretch. In Washington state, for example, EVs represented 8.6% of all new vehicle registrations in 2022. If we count on consistent linear growth in EV sales, Washington would need to reach 23% by the end of this year to reach its 2030 target for 100% new EV sales.

The growth in EV sales needed is unprecedented in global EV markets without robust incentives spurring consumer behavior. For example, one in five cars in Norway is now electric thanks in large part to incentives and tax advantages.

Clearly, a broader segment of U.S. car buyers needs to be empowered to acquire an EV than is occurring in the market today.

The federal tax credit is essential but not equitable

One measure that will help is the $7,500 federal tax credit for new EVs. According to a Zero Emission Transportation Association white paper, the federal tax credit is consistently the biggest driver of EV purchase decisions. Even in states with their own EV rebates, being able to layer on the federal incentive is important. More than half of state rebate recipients surveyed by the Center for Sustainable Energy (CSE) in California, Connecticut, Massachusetts and New York said the federal tax credit was “extremely important” in making it possible for them to buy or lease their EV. And CSE surveys in California show the federal tax credit’s influence in EV buying decisions has been increasing over the years.

However, while the federal tax credit is essential to accelerating EV sales, it has historically provided minimal assistance to LMI car buyers. Grist notes that a new car buyer would need an income of at least $66,000 with no other significant credits to have a sufficient tax burden to receive the full $7,500 credit. A CSE analysis of the tax liability of Americans with moderate incomes at or below 400% of the federal poverty level (FPL) – $111,000 for a family of four – shows less than 3% of this group would be able to use the full value of a non-refundable federal $7,500 tax credit.

Meanwhile, the new federal EV tax credit created in the Inflation Reduction Act (IRA), with new vehicle eligibility criteria and changing timelines, has caused confusion. Starting in 2024, the tax credit is expected to be transferable, for example, to a dealership, so that a car buyer wouldn’t have to wait to file their taxes to get the benefit.

EV prices have dropped, but remain out of reach

The average price of a new EV has been dropping in recent months, to $58,385 in February 2023 from more than $66,000 in July 2022. The price cuts indicate supply may be catching up with demand and greater availability of lower-priced vehicles. However, the average EV purchase price is still well above the industry average, closer to the luxury end of the market.

EVs remain out of reach for most LMI car buyers if they seek to spend no more than 15% of their income on transportation, which financial experts recommend.

CSE explored affordability of new EVs for LMI car buyers, accounting for state and federal incentives and factoring in different costs – such as monthly car payments, insurance premiums and charging costs. CSE determined that an LMI family of four with a household income at 225% FPL ($51,188) would need a minimum incentive (state and federal) of at least $15,000 for there to be affordable EV options, including the Nissan Leaf, Chevy Bolt and Mini Cooper.

So, although prices are coming down and the federal tax credit helps, neither is sufficient to close the affordability gap for most LMI car buyers.

Action is needed to ensure EVs are attainable for low- to moderate-income drivers

New EV sales are increasing, but not fast enough to reach 100% goals by states’ targeted timelines. Those 2030 or 2035 targets were set because the transportation sector persists as the largest source of U.S. greenhouse gas (GHG) emissions and significant reductions are needed sooner rather than later to avert the worst impacts of climate change outlined in the latest United Nations report.

But accelerating EV adoption is about more than the environment. State EV incentives are also critical to ensuring clean transportation is available to households that have borne the brunt of the harmful health and environmental impacts from fossil fuels. EVs, with their lower operating and maintenance costs, should not be a luxury. Helping people with lower incomes also reap the economic benefits of EVs is a critical outcome.

California recently approved sweeping changes to significantly increase rebate amounts and revamp a financial assistance program to help remove financial obstacles to EV ownership. Other states and utilities are seeking to bridge the financial gap for LMI car buyers through added incentives for LMI car shoppers, MSRP caps to encourage automakers to lower prices, and used EV rebate programs.

In contrast, Oregon recently announced the upcoming suspension of their state EV rebate program due to overwhelming demand. The suspension means that any EV purchased after May 1 is ineligible for a rebate, even once the program reopens. When Georgia repealed their EV incentive, EV sales plummeted 83% over the next 1.5 years. To avoid a similar decline in Oregon, additional funding is needed urgently to minimize the rebate program suspension.

We urge other states to implement EV incentives (point-of-purchase vouchers and/or financing assistance) focused on low- and moderate-income car buyers, with additional incentives for LMI car buyers in greatest need of assistance (<225% FPL) and/or living in disproportionately impacted communities.

In this way, state EV incentives can reinforce the federal commitment to equity made in the Justice40 Initiative to ensure access to clean, reliable and affordable transportation is available to all car buyers.