DETROIT (AP) — Thanks to a nudge from the government, leasing — not buying — is becoming the most affordable way to get your hands on an electric vehicle.
Last year’s Inflation Reduction Act provided a federal tax credit of up to $7,500 to be used for an electric vehicle. According to the rules, a dealer can apply this credit to any leased electric vehicle, no matter where it is manufactured, to reduce a customer’s monthly payment.
This is not the case for people who buy an electric vehicle.
For buyers, only electric vehicles manufactured in North America are eligible for the full tax credit. And only 10 of the 49 electric vehicles on sale in the United States this year meet that requirement. Even then, the electric vehicle must contain certain percentages of battery parts from the United States or countries with which it has a commercial agreement for the buyer to receive a full credit of $7,500.
Why the distinction between leased and purchased vehicles?
The Treasury Department says that in establishing the tax credit, Congress classified leased — but not purchased — electric vehicles as “commercial” vehicles. By law, commercial vehicles are exempt from North American battery manufacturing and content requirements. The result is that people who rent have a much wider choice of electric vehicles that qualify for the $7,500 credit.
“The affordability of leasing has exceeded the affordability of buying” in a JD Power index that includes total cost of ownership, said Elizabeth Krear, vice president of the EV practice at JD Power.
Many consumers have realized the difference and are taking advantage of it. In April, Krear said, leases accounted for 41% of all electric vehicle deliveries in the United States, four times the percentage in December, before the new rules took effect.
Geoff Pohanka, president of a group of 21 dealerships in Maryland, Virginia and Texas, said he expects leasing to increase. Buyers, he predicts, will increasingly recognize that the tax credit will help cover the typically substantial cost difference between an electric vehicle and a similar gasoline-powered vehicle.
“It definitely makes sense,” he said. “Incentives can move the market if it reduces the affordability problem between gasoline and electric cars.”
Pohanka, whose group sells vehicles from several automakers, said the tax credits were just beginning to reduce the cost of leasing. Yet the rules governing credit are complex enough that some buyers seem uncertain whether they would qualify. The rules don’t just make distinctions between leased and purchased vehicles. They also include income thresholds that disqualify some buyers.
To qualify for the tax credit, a car cannot cost more than $55,000. SUVs, pickups and vans cannot exceed $80,000. And a buyer’s gross income must not exceed $150,000 if single, $300,000 if filing jointly, and $225,000 if head of household.
Given the confusion he’s noticed among customers about tax credit eligibility, Pohanka said some electric vehicles sit on dealer lots longer than they otherwise would.
“This disruption, I think, is very detrimental to the momentum of electric vehicles,” he said.
Critics, including some Capitol Hill lawmakers, say they view Treasury rules that allow many leased, but not purchased, electric vehicles to receive the full tax credit as an unfair loophole. They argue that this benefits automakers that produce all of their vehicles overseas and have yet to build electric vehicle and battery factories in the United States. These foreign automakers, they say, can focus on leasing electric vehicles in the United States at the expense of domestic automakers.
Senator Joe Manchin, a Democrat from West Virginia and a key author of the tax credit language, wanted the North American manufacturing requirement to help boost manufacturing jobs in the United States. He included battery requirements to incentivize companies to build a national electric vehicle supply chain. But Manchin says the Biden administration is circumventing the intent of the law by allowing tax credits for foreign-made vehicles.
“The administration continues to ignore the purpose of the act, which is to bring manufacturing back to America and ensure that we have reliable and secure supply chains,” he said in a statement.
Foreign automakers have complained of being barred from the buyers’ tax credit despite the bill’s intent – to build battery and assembly plants in the United States.
The Treasury Department denies creating a loophole and says it was Congress that exempted commercial vehicles from manufacturing and battery requirements. When a dealer buys a vehicle and leases it to someone, it is equivalent to a commercial transaction. The dealer or a finance company receives the tax credit and retains ownership of the vehicle.
“Eligibility for the commercial vehicle credit is a simple reading of the Inflation Reduction Act as written by Congress and the application of long-standing tax laws to leased assets,” Ashley wrote. Schapitl, a spokeswoman, in a statement. “There was no room for interpretation of the Treasury.”
Hyundai, with three models of electric vehicles made in South Korea and on sale in the United States, is among the beneficiaries of the leasing clause. A spokesperson for the Korean automaker said the leases accounted for 30% of its US electric vehicle deliveries in the United States from January to March. In 2022, this proportion was only 5%.
The average monthly cost of owning an electric vehicle leased for three years has dropped $403 since December, largely due to tax credits, JD Power found. In contrast, for an EV purchase financed over five years, the average monthly cost decreased by only $118.
Hyundai is offering to lease an Ioniq 5 SE rear-wheel-drive electric vehicle for $499 per month for three years, although the customer must deposit nearly $4,000. Buying the same electric vehicle would cost $865 per month for five years at the average new vehicle loan rate of 7%.
Although it may be cheaper, leasing will not fit into everyone’s financial plans. Unlike a purchase, monthly payments do not end when a loan is paid off.
Experts also note that not everyone who leases an electric vehicle will receive the tax credit, even if they qualify for it. Car manufacturers and dealers are allowed to decide whether or not to pass on the tax credit to their customers; they are not required to do so.
Krear said some companies are transferring the entire $7,500 credit to eligible consumers, lowering their monthly payments. Others transmit only part of it.
Eventually, as automakers make adjustments to comply with North American requirements for battery manufacturing and composition, buying an electric vehicle could cost less than long-term leasing, said Krear, although there are too many variables to predict when that might happen.
“At that time it will be a different playing field,” she said.