EV sales could drop nearly 30% if Trump repeals tax credit

Auto industry execs, fasten your seatbelts. If President-elect Donald Trump and his team repeal the $7,500 federal tax credit for EVs, as reported, the fallout will be massive.

The Biden administration’s signature climate law, the Inflation Reduction Act, introduced the $7,500 EV tax credit for consumer vehicles and numerous others for commercial EVs and battery production, among other things.

Since the law’s inception in 2022, EV sales have taken off. In 2023, the first full year of the credit, EV sales jumped 46% year over year to 1.19 million, compared to 813,000 in 2022, according to Cox’s Kelly Blue Book.

Last month in a new report dubbed “The Effects of ‘Buy American’: Electric Vehicles and the Inflation Reduction Act, researchers Joseph Shapiro, Hunt Allcott, and Felix Tintelnot quantified the tax credit effect.

After constructing a model and running a simulation, the report found that EV sales in the US would drop 27% if the federal EV tax credit were removed, compared to a scenario with the EV tax credit in place. The report found this would lead to EV registrations falling to 867,000 EVs from 1.184 million with the tax credit in place — or 317,000 fewer EVs.

Bloomberg News was first to highlight the results of this report.

“This specific scenario is take summer of 2023, take all the conditions — supply, demand, and take away the EV tax credits — how would sales fall?” Joseph Shapiro, UC Berkeley associate professor of economics and co-author of the report, told Yahoo Finance.

With EV sales growing nearly 40% year over year last year, losing the EV tax credit is a “substantial change,” Shapiro said. “It’s a rapidly growing market and relatively new technology, but [loss of the EV tax credit] is not trivial. I mean, $7,500 is not trivial,” Shapiro added.

But there are caveats here. Shapiro notes that while a 27% decrease is substantial, relative to what sales would be otherwise, it may not be that big of a deal. EV sales increased over 40% year on year in 2023, meaning sales could be at a “flatline” if the tax credit were repealed.

That being said, sales for this year are only trending up 10% year over year through Q3, according to Kelley Blue Book, indicating a significant impact, assuming sales trend at the same level in Q4.

While repealing the tax credit would be damaging to near-term EV sales, there are possible ways to refine its effects for the better. Shapiro and his co-authors also noted that the federal EV tax credit as constructed is not very efficient.

One alternative: different subsidies for different vehicles. Certain bigger EVs create “large negative externalities” — meaning they’re more likely to have fatal accidents in addition to high energy use. Smaller EVs get the same tax credit benefit despite being lightweight, better for safety, and demanding much less electricity.

“We’re giving the same $7,500 subsidy to most of those vehicles, and giving smaller subsidies to cars that have larger costs to society, larger externalities, that would make these subsidies more beneficial to society overall,” Shapiro said.

Tweaks, if any, will be down the road, and that path is uncertain, given Trump’s team is still in the process of being formed. For now, EV makers will probably have to deal with some potential bad news, with research showing over 300,000 fewer EVs sold with tax credit repeal.

Wall Street predicts automakers will have to find ways to pick up the slack somewhere — perhaps cutting into profits with deeper discounts.

“All else equal, a removal of incentives would make EVs significantly more expensive, adding downward pressure to out-year volumes, assuming [original equipment manufacturers] do not compensate with incremental discounting,” Morgan Stanley’s Adam Jonas wrote in a note earlier this week.

Jonas and Morgan Stanley believe Lucid (LCID), Rivian (RIVN), and Tesla (TSLA) are “most exposed” to the loss of the tax credit.

In the long run, Morgan Stanley predicts that EV adoption will not slow, despite short-term hiccups.

“While a slowing of EV adoption can provide valuable time for some legacy players to catch up, we still expect EV penetration to keep rising long term as innovation and scale will bring lower cost and higher performance products in the long term,” Jonas wrote.

Pras Subramanian is a reporter for Yahoo Finance. You can follow him on X and on Instagram.

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