Colorado is gearing up for an influx of electric vehicles, thanks to new state policies and pending legislation to increase the number of vehicles available for sale and who can sell them.
But there’s one thing in decline — the tax credits available to new electric-car buyers. Colorado’s credit for new EV purchases dropped to $4,000 in January and will be reduced again next year. Federal tax credits of up to $7,500 are still available for most EVs, though Tesla met its max at the end of last year and General Motors phases out by April. But there’s also state data indicating that fewer people are taking advantage of the credits.
The financial incentive offered by Colorado to boost the number of cleaner-driving cars on the road wasn’t meant to last forever, state officials say. With the tax credits, the state had the nation’s fourth-largest rate of EV sales compared to all vehicles, according to the Auto Alliance, an advocacy group for major auto manufacturers. The number of registered EVs also increased 500% in five years to 25,516 as of January. That’s still a tiny fraction compared to gas cars, which numbered more than 5.3 million registered in Colorado.
“The tax credit is really one of the primary policy measures that we can take as a state because electric vehicles are more expensive than a conventional vehicle,” said Christian Williss, director of program and initiatives at the Colorado Energy Office. “…But the tax credit does ratchet down every couple of years as we are going to see the cost of electric vehicles go down. The tax credit ends in 2026, which is about the point at which you start to see the cost of electric vehicles come into parity with conventional vehicles.”
The state of EV incentives
Colorado has offered some form of alternative fuel rebates or tax credits since 1992.
The current iteration, offering up to $5,000 in tax credits, dropped to $4,000 in January and will be reduced again to $2,500 next year. Last year, the state legislature extended the income tax credits through the end of 2025, offering $2,000 a year between 2023 to 2025.
Rebates, tax credits or other incentives have long been one of the major factors influencing a buyer’s decision to go electric, according to several studies including one from the National Renewable Energy Laboratory in Golden.
In looking at 400 state and local incentives intended to encourage the adoption of plug-in electric vehicles since 2008, the 2018 NREL study found that for every $1,000 of tax credits, battery-electric vehicle sales improved 5.3%, while similar rebates increased sales by 7.7%. For Colorado’s $5,000 tax credit, that means the incentive likely improved sales by 26.5%.
Without them in Georgia, which ended its $5,000 credit in July 2015, registered EVs dropped 83% a month later and hadn’t rebounded two years later, according to a story in The Atlanta Journal-Constitution.
But as electric vehicles become more prevalent and the costs to make them decline, the need for incentives will dissipate, said Caley Johnson, NREL’s senior transportation market analyst who co-wrote the study.
“Battery costs (which are a majority of the EV cost) are decreasing quickly. Rocky Mountain Institute has run projections that show EV costs dropping below conventional vehicle costs quite soon,” Johnson said. “At this point, purchase incentives will not be needed.”
Fewer using tax credits?
Colorado’s EV tax credits, which can either offset a buyer’s state income tax or become a refund, appear to be less popular than one would think. After a 35% increase in applicants in 2016, the number of taxpayers cashing in dropped back down in 2017. (Data for 2018 and 2019 is not yet available.)
Between 2012 and 2017, data from the Department of Revenue shows that about 2,000 taxpayers were getting the tax credits each year. The exception was 2016, when a new law went into effect and 3,058 taxpayers opted for the credit. The law let financial lenders handle the paperwork so EV buyers could get that $5,000 taken off the price at the time purchase. But the next year, in 2017, the number fell back down to 2,218. The amount of money credited to taxpayers also declined 12% to $10.8 million in 2017.
Data is limited since tax credits are part of the personal income-tax information and is not shared — even among state officials, who are uncertain what happened.
Williss with the Energy Office said his agency isn’t privy to how many electric vehicles were sold based on taxpayers who claimed the credit because of privacy laws. But there’s also confusion in how the data is collected. A taxpayer buying more than one EV could claim multiple credits but still counts as one taxpayer. The decline in taxpayers could mean one taxpayer purchased multiple EVs or a lender handled multiple applications.
But, he said, “it wouldn’t explain the decline in the amount of the tax credits. I would just reiterate that since we don’t get data on the tax credits, it’s hard for us to draw any conclusions.”
There’s a sentiment that tax incentives aren’t as effective as policy makers hope, said Katherine Loughead, a senior policy analyst with the Tax Foundation, a tax-policy think tank in Washington, D.C.
“It’s hard to track all of that so it’s hard to show how effective it (a tax credit) really is versus if the state had just saved its money and allowed the market to do what markets do best,” Loughead said. “Colorado is a state where a lot of people who live there care a lot about their environment, care about preserving the environment and so you could see a lot of consumers making those purchases anyway. So, in many cases, offering a generous rebate is giving a tax subsidy or a tax break to a lot of people that would purchase those vehicles regardless of whether there was a tax benefit.”
Johnson, with NREL, said there are two types of EV customers: those seeking prestige who are less dependent on tax credits; and typical commuters who need a reliable car to get around. With the market now moving beyond early adopters, this is when tax credits and rebates could have more impact. State incentives may become especially meaningful as federal ones end.
“For the more economic-minded electric vehicle purchasers, (an incentive) makes a difference going forward,” Johnson said. “It could be critical to help bridge that gap.”
Nigel Zeid, EV specialist at Boulder Nissan, believes that most auto dealers aren’t pushing the tax credit because it can be a financial burden for the dealership. Just like taxpayers, lenders can get the credit paid back only once a year — after tax season.
“The main reason is it ties up an awful lot of money, and not everyone is prepared to do that,” said Zeid, who would prefer payments to be quarterly. “We are holding on to all of those — $4,000 now, but $5,000 last year — until the end of the year, which is a lot of money to hold on to.”
He said Boulder Nissan sold roughly 440 electric vehicles last year and offered the discount to every customer. Not everyone took the credit, but if they had, 440 vehicles qualifying for the $5,000 credit translates into $2.2 million that the dealership wouldn’t see paid back until the next tax season.
However, his dealership offers it to every new EV-buying customer because, as he sees it, it’s for his customers.
“If you are someone that is payment driven, that $4,000 or $5,000 last year, makes a massive difference in what your monthly payments is,” Zeid said.
When EV incentives aren’t needed
When Colorado officials put together the case last year to become a zero-emissions state, its research concluded that the price of EVs and conventional cars would be about the same by 2027, at $25,586 for an EV and $25,936 for a conventional car. Colorado did adopt the ZEV policy in August 2019, which means by 2023, automakers must make sure a certain percent of their cars sold in the state are electric.
More EVs are on the way, especially if a bill at the state legislature is passed. Senate Bill 167, which already passed in the Senate, gets its first hearing in the House on Monday. It would allow electric vehicle makers that don’t have an existing franchise to bypass local dealerships and sell directly to consumers.
If passed, this will likely attract all sorts of new automakers to Colorado, including electric SUV maker Rivian, which has no plans to go the traditional dealership route and instead seeks to sell cars online. While Rivian’s prices start around $70,000, other startups plan to bring in more affordable options. The Ocean SUV from California-based Fisker, for example, is expected to start at $37,500.
The day when an electric vehicle costs about the same as a conventional car is expected by 2030, according to a report by The Rocky Mountain Institute, an organization focused on shifting the world from fossil fuels to renewables. Added investment and increased battery manufacturing could cut costs by more than half between 2018 to 2023.
But we’re not quite there yet. However, while the upcoming electric trucks and SUVs have prices closer to six figures, overall EV prices appear to be coming down. The new electric Ford Mustang Mach-E, expected later this year, starts at $43,895. The Tesla Cybertruck starts at $39,900 and is expected to be available in late 2021. Delivery for the 2020 MINI Electric Hardtop, which starts at $29,900, is expected to begin this month.
According to valuation analysts at Kelley Blue Book, the average transaction price for an electric vehicle in December dropped 14.9% to $54,380, from $63,883 a year earlier. For comparison, the price for conventional gasoline compact SUVs and crossovers stayed about the same, at just under $30,000.
State and federal tax credits are still available for most EV models. But there are other resources to help consumers offset the cost of going electric. Xcel Energy teamed up with Mitsubishi and Nissan to offer rebates. There is a $3,000 rebate on a 2019 Mitsubishi Outlander PHEV and up to a $3,500 rebate off a 2019 Nissan Leaf. Both offers expire March 31.
The rebates, which are on top of any state or federal tax credits, have been popular, said Michelle Aguayo, an Xcel spokeswoman. Through October 2019, 35 Outlander PHEVs have sold with this rebate in Colorado, while the Nissan rebate accounts for 10% of registered Leaf vehicles in Colorado, she said.
“We’ve shared the success of these rebates with other automakers, who are beginning to show interest in how Xcel Energy can support sales of additional brands and models,” she said.
Once the federal and state incentives end, Johnson, with NREL, doesn’t see them coming back as efforts turn toward expanding electric fleets and buses or improving access to EVs by supporting more charging stations, especially in rental properties.
“I feel like (incentives) have done their job in general,” Johnson said.