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Living With Climate Change: Thinking about an EV? First-ever $4,000 tax credit for used electric vehicles, and $7,500 for new, gets OK from Congress

The House on Friday approved a compromise spending bill that devotes more than $360 billion to climate change efforts, and consumers for the first time will have a tax incentive to use toward previously owned zero-emission electric vehicles.

The Senate gave its OK on Sunday, and the measure is expected to get signed into law quickly by President Joe Biden.

Related: Here’s how the Inflation Reduction Act’s rebates and tax credits for heat pumps and solar can lower your energy bill

These incentives could drive up interest in brands such as Tesla
and other automakers assembling in the U.S. that turn out alternatives to gas engines.

But consumers will have to balance excitement over these purchase sweeteners — a conditional $4,000 tax credit for used EVs and $7,500 for new ones — against scarce inventory and vital semiconductor chip shortages. Cars, trucks and SUVs, especially EVs, are now much less mechanical and more digital.

The spending bill is much more modest than the $3.5 trillion version Democrats originally put forward. But it restores some of the sustainable energy, EV and broader environmental efforts that featured prominently in early versions, It also comes at a time when Americans, and many around the world, are struggling with high inflation, recession jitters and volatile energy prices

The used-EV tax credit is worth either $4,000 or 30% of the auto’s price, whichever is less. And the price cap of qualifying vehicles is $25,000.

According to Cox Automotive, the average price of a used EV in the U.S. is $25,500, about right at the purchase-price limit for filing for the EV used taxed credit. Remember, that’s the average. Lower-cost EVs exist.

The credits come with income caps as well: Individual tax filers must have income below $75,000 to be eligible for the credit. That cap is $150,000 for joint filers and $112,500 for heads of household. 

Read: Used EVs: How to navigate the tight market for pre-owned electric vehicles like the Nissan Leaf and Chevy Volt

Tax breaks for buying new EVs have some requirements. New EVs will need to be built with minerals — such as high-demand lithium and cobalt — that are extracted or processed in a country with which the U.S. has a free trade agreement. And they must include a battery that features a large percentage of components that were manufactured or assembled in North America. 

Related: Tesla’s Model Y is the hottest used car in the U.S. right now

Read: Tesla reports better-than-expected Q2 profit, jump in sales

The legislation also includes a cap on the suggested retail price of eligible vehicles of $55,000 for new cars and $80,000 for pickups and SUVs. Credits would be capped to an income level of $150,000 for a single filing taxpayer and $300,000 for joint filers for new vehicles, and at $75,000 and $150,000 for used cars. 

Proposed legislation removes prior requirements that called for qualified vehicles to have solely plug-in electric drive motors. The new version leaves out a 200,000-vehicle-per-manufacturer cap that automakers fought against. That means Tesla, GM
and Toyota
which had all reached the cap, can lure buyers with this tax break yet again.

Don’t miss: GM has ‘pivotal’ months ahead, Wall Street says

BTIG analysts also said in a note that EV credits appear to cover hydrogen-powered vehicles as well. That source is seen as key to “greening” the cargo and ground-shipping markets.

EV industry participants say the inclusion of lower-priced used EVs is key to ramping up a transition from emissions-spewing traditional engines to zero-emission alternatives.

Charging company EVPassport’s co-founder Hooman Shahidi said access to widespread, quicker charging and access to the vehicles themselves are what will boost growth in this market. A deeper and incentivized used market can only help. That includes drivers for Uber
and Lyft
whose margins can be improved by a gently-used EV, Shahidi said.

Read: These clean energy ETFs have been outperforming — and there’s a fundamental reason why

In fact, more competition from used versus new offerings could benefit consumers with pressure on automakers to increase EV quality, which a recent J.D. Power report says has dropped in part because of the rush to meet market demand.

And Shahidi said as car buying shifts away from dealerships to direct purchases, that can likely boost EV access.

“Dealerships across the board are making more money than ever before just purely because of supply and demand,” he said in a recent interview with MarketWatch. “Direct buying is getting more enticing. I challenge I challenge CarGurus and True Car, make it easy for people to have access to that same experience with used cars, and specifically used EVs,” he said.

“It doesn’t cost a lot to compile a database of all the used cars that are for sale, that are electric, and give people the access,” he said.

Read: EVs can store power for our homes and the grid: Why ‘vehicle-to-everything’ technology is a must-follow investing theme

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