The Shifting Burden: Tax Incidence and the EV Market
Recent changes in Illinois tax law and the expiration of federal EV tax credits offer a clear illustration of a fundamental economic principle: tax incidence - who actually bears the cost of a tax, regardless of who is legally responsible for paying it.
In Illinois, a new $0.50 tax is being applied to each sports betting wager made through apps like DraftKings and FanDuel. While the tax is levied on the betting companies, they are choosing to pass this cost directly onto consumers in the form of a $0.50 surcharge per bet. This demonstrates a clear shift in tax incidence from the companies to their customers, increasing the overall cost of each wager.
A similar dynamic is unfolding with the federal $7,500 EV tax credit, which ended on October 1st. Consider a Tesla Model Y, previously effectively priced at $40,000 with the credit factored in, now reverting to its standard $47,500 price tag. This $7,500 increase presents a challenge for EV manufacturers like Tesla.
They face a critical decision: absorb the cost of the lost tax credit and maintain current pricing, potentially sacrificing profit margins, or maintain their existing prices, leading to a likely decrease in demand as EVs become less affordable. If tesla chooses to keep prices the same, a decline in sales due to the higher price would ultimately translate to lower earnings. Conversely, absorbing the cost directly impacts their profitability.
Regardless of the path chosen, EV manufacturers are poised to experience a reduction in earnings. The key for these companies will be to carefully balance the impact of this shifted tax incidence.
As reported by CNBC, the automotive industry is now bracing for a ”new baseline demand” for electric vehicles. Without the federal incentive, manufacturers must assess how sensitive consumer demand is to price increases and decide whether to lower retail prices or pass the cost onto buyers. The expiration of the EV tax credit represents a significant hurdle for the industry as it strives to maintain its growth trajectory in a more competitive landscape.