Policy Environment for Used Electric Vehicle Incentives

When the Inflation Reduction Act was drafted, it had multiple goals, which can be loosely summarized as promoting clean energy, reviving the domestic industrial base, and making clean tech more affordable for consumers. Related to that is the Justice40 initiative, whereby the program design devotes substantial resources to direct these benefits to environmental justice communities.

EVs are very much a part of Justice40. Not only are the jobs important, but air quality is often poor in these communities. That is certainly the case in Connecticut with our bad and getting worse air pollution. (The new State of the Air report by the American Lung Association is due out next month. Keep an eye out if you want to get depressed.)

The early adopter profile for EVs, as with many products that represent a substantial purchase, is upscale. Though certainly helpful, new vehicle incentives alone may not be enough to reach a mass market. For EVs to displace internal combustion vehicles at scale, anyone who can afford to own a car needs to be able to afford an EV. The majority of vehicle sales in any given year are used vehicles. According to the Federal Bureau of Transportation Statistics, used vehicles accounted for 71% of all vehicle sales in 2019 (the most recent available data). And so, an incentive for used cars was incorporated into the IRA. The question is how easy is it for the consumer to access it.

Inflation Reduction Act Used EV Incentive Basics

These are the basic rules for the federal used EV incentive.

• Purchase price cap of $25,000.
• Only purchases through new or used car dealers are eligible.
• The incentive is 30% of the purchase price, capped at $4000.
• Purchaser income limit of $150,000 modified adjusted gross income for joint filers, $112,500 for head of household filer, and $75,000 for single filers.
• Income eligibility can be determined by the current or prior year.
• Vehicle model year must be 2 years older than the current model year.
• Transfer provision can be used. This provision is new for 2024 and allows the buyer to transfer the credit to the seller and receive it as a point of sale rebate.
• Minimum battery pack size of 7 kWh.
• No more than one incentive per VIN. As a practical matter, this is a non-issue at this point. The incentives just haven’t been around that long.
• Dealer registration with the Department of the Treasury is required in order for the consumer to receive the incentive. There are specific registrations for both the tax credit and for the transfer.

None of the new car rules regarding domestic assembly, battery mineral sourcing and manufacturing, and foreign entities of concern apply to used vehicles.

Dealer Registration

In order for a consumer to receive the incentive (new or used), the dealer that sells the vehicle must be registered with the Department of the Treasury (IRS). Not every dealership is registered. Unfortunately, there is no publicly available list of registrants, which we regard as a big oversight on the part of Treasury. It is necessary to contact the dealership you are thinking of visiting, though some have proactively advertised their participation. Based on what we have been hearing through our conversations with the Electric Vehicle Association, about half of new car dealerships have registered and a much lower percentage of used car dealerships.

We have heard various reasons why a given dealership may not have registered:

• Dislike of the IRA.
• Not interested in selling EVs.
• Registration declined by Treasury for whatever reason, for example an incomplete application.
• Registration still in process.
• Affiliated manufacturer doesn’t make incentive-eligible EVs so why bother, or why bother just for used EVs.
• Avoidance of non-mandatory involvement with the IRS.

This blog reached out to the two largest used car chains, CarMax, which is the largest by a mile, and Carvana. In both cases, these companies are set up to provide the Time of Sale report so the customer can claim the tax credit, but neither is registered for the transfer. CarMax is at least thinking about it. In their response to our inquiry, they wrote, “…We anticipate developments on the credit transfer in the future.” If we hear about a subsequent update, we will publish it!

Tesla

As with the new vehicle incentives, Tesla is also registered to process both the tax credit and the transfer for used EVs.

Used EVs are an Underdeveloped but Important Market

Our view is that the transfer is very important for the used EV market since there will be a higher incidence of consumers unable to make use of a conventional tax credit. (These tax credits are non-refundable, meaning if you are not able to use it, you lose it, and there is no carry-forward provision.)

We do not have access to a subscription service that tracks vehicle sales. Our very back of the envelope calculation, filtering for vehicles registered in 2023 with a model year of 2021 or older indicates that roughly 5725 used EVs were sold in CT last year. So, not nothing, considering there were about 18,000 overall EV registrations occurring last year.

Private Sale Workaround?

This incentive structure with the registration was designed to work through dealers and does not apply to private sales. However, a company called KeySavvy, which has a dealership license, is offering to facilitate private transactions via its dealership status and does offer the transfer. (We do not have personal experience with them.) This is a sceengrab from their website. If any readers use them, please let us know how it goes.

State Incentive

This article mainly focuses on the IRA, but there is also a CT CHEAPR incentive for used EVs. It is part of the Rebate+ incentives that are available for households with income of no more than 3 times the federal poverty level or that are located in an Environmental Justice or Distressed Community. This is a true point of sale rebate, not a tax credit, and it gets deducted from the invoice price. It is $3,000 for a battery electric vehicle and $1125 for a plug-in hybrid. Rebate+ also offers an added incentive for new EVs and the total of the base and + incentives are $4250 (BEV) and $2250 (PHEV). To avoid a suspenseful purchase experience, consumers can register in advance and obtain a pre-qualification voucher from DEEP. Vehicle eligibility for this rebate is limited to vehicles that were eligible when new. Eligible vehicles can be found on this page of the CHEAPR website. The website also has a link to which communities are EJ/distressed.

Usual Disclaimer: As always, we seek to provide the most up to date information but things change and it is always advisable to check when shopping for a car and to check with your CPA.

The used car market, in general, is more than double that for new vehicles. That does not appear to be the case for EVs to this point.

CHEAPR Likely to Implement Used EV Incentive in 2021

CHEAPR, the CT state EV purchase incentive program, is considering offering incentives for purchases of used EVs. This incentive would be limited to lower and middle-income individuals/families. There are a number of changes being considered by CHEAPR, but with respect to used EVs, the legislature specifically authorized this incentive, the proposal was well received by the board, and the public comments were favorable. It seems a lock to happen, though there are below the line development tasks that will cause it to not be available until next year.

What is the State of the Used EV Market

We don’t have access to the data that would enable us to definitively answer this. But we have some information that may be useful for drawing inferences.

During the CHEAPR board meeting of July 17th, there was a presentation by the auto-dealership representatives on the board. They stated that there are few used EVs in the marketplace and the prices were low, creating an unvirtuous circle. They support the incentive and think that that it promises to sufficiently stimulate consumer demand so that dealers will be willing to bid more aggressively at auctions to augment the supply in the state.

The used EV incentive will differ from the new car incentive in that it will also apply to independent used car dealers. Used car dealers do not have to be affiliated with a manufacturer. A Google search for “used EVs for sale in CT” brought up a results page consisting of only independent dealers, mainly large ones like Carvana, Iseecars, and CarGurus. Those companies had both paid and organic listings on this first page of the search results. A search for “used Teslas for sale” brought up a largely similar set of sites, except that Tesla itself appeared, as it is in the business of retailing its own used vehicles. There is another company specializing in used Teslas called OnlyUsedTesla.com.

I suspect that the board members who represent the dealerships are not factoring Tesla into their thinking. For them, EVs are still a niche product and many of the non-Tesla EVs in the used marketplace are the first generation (read: low range) models. (We may be at a point where this is beginning to change as later model EVs are now coming off-lease.) And the dealers, based on the search results and their own words, aren’t making a serious effort to source and sell them. The fact that the independents are spending money on sponsored links indicates that there is at least a minimally viable business. Search is highly targeted and can yield a positive return on a small campaign.

Quantify Used EVs from the DMV File

To get some kind of quantification of used EVs relative to new, I went back to the file we recently got from the DMV of all registered EVs in the state as of July 1, just to get an idea of what was entering the market. My proxy for used EVs was vehicles added to the file between January and July with a model year earlier than 2019. This is a rough measure and is reflected in the chart at the top of the post. Each bar represents vehicles added to the file in the first half of the year sorted by make, with the orange portion being those that are categorized as used by our proxy measure. 22% of the EVs added to the file could be characterized as used based on this definition. 47% of the vehicles added are Tesla, but only 10% of those fit this definition of used.

• This, coupled with the information from the dealers, indicates a small used EV market at this point.
• Even though it is small, there is a used EV business.
• The fact that there is no franchise requirement begs the question of whether Tesla could sell used EVs in Milford (or elsewhere in the state) using the same rationale that led to their being able to lease. In the case of new vehicle leasing, customers still have to go out of state to pick up the vehicle. Would that be a requirement if they could sell used?
• The EV Club is supportive of a used CHEAPR EV incentive, but based on this information, along with the LMI restriction, we don’t expect that it will be disbursing large sums in 2021.
• It is important, as used and possibly other incentives, are incorporated into CHEAPR, that the stats page be updated to track them separately.

The CSE, DEEP’s consultant for CHEAPR, has been sent back to model new scenarios and we will see what they forecast.