Economic Perspectives on Electric Vehicle Tax Credits

August 21, 2025

Economic Perspectives on Electric Vehicle Tax Credits

P.L. 119-21, commonly known as the One Big Beautiful

Bill Act (OBBBA), terminated three tax credits for plug-in

electric vehicle (EV) purchases: the used clean vehicle

credit (UCVC), the credit for qualified commercial clean

vehicles (CQCCV), and the clean vehicle credit (CVC).

This In Focus provides background information on the

economic, environmental, and distributional impacts of EV

tax credits. It describes studies examining the degree to

which EV tax credits boost EV sales, reduce greenhouse

gas (GHG) emissions, and change the distribution of

income in the United States.

Legislative Background

The UCVC and the CQCCV were enacted as part of the

Inflation Reduction Act of 2022 (IRA; P.L. 117-169). The

CVC was enacted under the Energy Improvement and

Extension Act of 2008 (P.L. 110-343) and was modified in

the IRA. The UCVC provides a credit of up to $4,000 for

individuals purchasing used EVs costing $25,000 or less;

the CQCCV provides a credit of up to $40,000 (or $7,500

for light-duty vehicles) for businesses purchasing EVs that

are leased to customers or used in the ordinary course of

business; and the CVC provides a credit of either $3,750 or

$7,500 for individuals purchasing new EVs, subject to

certain income, price, and domestic content requirements.

These three credits and their qualifying criteria are

described in greater detail in CRS In Focus IF12600, Clean

Vehicle Tax Credits.

P.L. 119-21 terminated the EV tax credits for vehicles

acquired after September 30, 2025. The repeal of the three

credits is projected to reduce federal deficits by $190 billion

over the 10-year budget window (FY2025-FY2034).

Marginal vs. Inframarginal Tax Credit

Recipients

The efficiency of EV tax incentives depends, in part, on the

degree to which they induce marginal EV buyers or accrue

to inframarginal EV buyers. Marginal EV customers are

those whose decisions to purchase or not purchase an EV

are directly impacted by the existence of a tax incentive.

Put differently, they are on the fence (or margin) with

regard to their decision. In contrast, inframarginal buyers

are those who have decided to purchase an EV regardless of

the tax credit. The tax credit may cause inframarginal

buyers to purchase a more expensive EV (albeit without

violating any price limitations in the relevant credit), but it

does not motivate a decision to purchase an EV.

The distinction between marginal and inframarginal

purchases is important when examining EV sales data.

According to Argonne National Laboratory, EV purchases

have increased more than five-fold in recent years, from

1.9% of light-duty vehicle sales in 2018 to 9.8% in 2024.

The stock of EVs on the roads has similarly increased from

0.4% of light-duty vehicle registrations in 2018 to 1.7% by

2023, according to the Department of Energy. Not all of the

increase in sales can be attributed to the EV credits.

While the precise estimates differ, the literature on EV tax

credits suggests that most tax credit recipients would have

purchased an EV without the credit. For such individuals,

the credit represents a financial windfall.

Studies of the IRA-reformed credits suggest that roughly 7

out of 10 EV tax credit recipients are inframarginal. Allcott

et al. (2024) estimate an inframarginal share of 67% to

77%; the Congressional Budget Office (CBO) (2023)

estimates a share of 68%; and shortly after the IRA’s

passage, the Brookings Institution (2023) projected that

73% of EV tax credit recipients would be inframarginal.

These estimates align with studies of other EV tax credit

programs. Xing et al. (2021) and Tal and Nicholas (2016)

estimate that for the previous version of the CVC—that

which predated the IRA—70% and 71.5%, respectively, of

tax credit recipients were inframarginal. Similarly, Chandra

et al. (2010) found that in Canada, 74% of consumers

receiving a rebate for hybrid vehicle purchases would have

bought a hybrid without the rebate. Finally, when the

German government abruptly and unexpectedly eliminated

a $4,900 EV subsidy, year-over-year EV sales fell 26.6%,

consistent with roughly three-quarters of subsidy recipients

being inframarginal.

Environmental Impact: Displaced

Vehicles and Their Emissions

EV credits may increase economic efficiency by addressing

the spillover costs imposed on society (also known as

negative externalities) when one person’s actions create

costs for other people. Driving gas-powered cars can create

negative externalities, harming individuals who breathe

polluted air or suffer through heat events attributable to

climate change. EV tax credits may lower the usage of gaspowered cars, thereby decreasing air pollution, greenhouse

gas emissions, and other externalities. Tax credits will

prove more effective at shifting consumers away from gaspowered cars and toward EVs if consumers are sensitive to

reductions in the after-tax-credit prices of EVs.

Research into the environmental effects of EVs and gaspowered cars has not yielded precise, consistent results.

However, such research indicates that EVs generally

produce less pollution than gas-powered cars, especially

when EVs use electricity produced from sources such as

wind, solar, or nuclear power, among others. Analyses of

lifecycle GHG emissions—emissions associated with

manufacturing, driving, and even scrapping a vehicle—

indicate that for model year 2019, battery-electric vehicles

(BEVs) produce 1.8-3.5 tons of carbon dioxide equivalent

per year, whereas gas-powered cars produce 4.1-14.7 tons.

https://crsreports.congress.gov

Economic Perspectives on Electric Vehicle Tax Credits

These findings are discussed in greater detail in CRS

Report R46420, Environmental Effects of Battery Electric

and Internal Combustion Engine Vehicles.

While the estimates in the previous section indicate that

roughly 70% of EV tax credit recipients are inframarginal,

they also imply that the OBBBA’s repeal of the credits will

cause a 25%-30% decline in EV sales. Estimates of the

price elasticity of demand for EV sales generally range

from 1.4 in Allcott et al. (2024) to 2.67 in Xing et al.

(2021). A price elasticity greater than 1 indicates that a 1%

decrease in the after-tax-credit price of EVs increases

overall EV purchases by more than 1%. These estimates

indicate that although some EV buyers receive windfall

gains from the credits, a dollar in credits induces more than

a dollar of EV purchases. If higher EV sales lead to fewer

purchases of gas-powered cars, GHG emissions may fall as

a result.

Comparisons between average gas-powered cars and

average EVs may overstate the environmental benefits of

EV credits. Xing et al. (2021) indicate that EV tax credits

disproportionately decrease purchases of other fuel-efficient

vehicles, including hybrids. Tal and Nicholas (2016) find

that many marginal tax credit recipients would not have

bought any car in the absence of EV tax credits; for such

cases, EV tax credits increase air pollution and GHG

emissions. While these factors are not so significant as to

erase the environmental benefits of EV credits, Xing et al.

(2021) report that “ignoring the non-random replacement of

gasoline vehicles would result in overestimating emissions

benefits of EVs by 39 percent.”

However, studies of tax credits for EVs and hybrids find

that consumers reap most of the benefits. Sallee (2011),

Gulati et al. (2017), Muehlegger and Rapson (2022), and

Barwick et al. (2023) find that tax credit recipients capture

70% to 100% of the incidence of EV or hybrid tax credits.

Drawing upon such findings, Borenstein and Davis (2025)

use tax filing data from 2009-2021—prior to the enactment

of the IRA—to study the distributional impact of EV tax

credits, under the assumption that credit recipients capture

100% of credit incidence. They estimate that taxpayers in

the top 5% of the income distribution reaped 50% of all EV

tax credit benefits, whereas taxpayers in the bottom 60% of

the income distribution received less than 3% of benefits.

The distributional effects of the IRA-reformed EV tax

credits may differ from the pre-IRA credits studied by

Borenstein and Davis (2025). Three reasons for this are as

follows:

• The IRA created the UCVC. Because the credit applies

to used vehicles, which are cheaper than new vehicles, it

may be claimed by low-income taxpayers at a higher

rate than the CVC. However, the credit has experienced

low take-up, with 28,000 taxpayers claiming the UCVC

in 2023, as opposed to 488,000 claiming the CVC.

• The IRA disallowed the CVC for single taxpayers with

incomes above $150,000 and for married couples with

incomes above $300,000 in back-to-back years.

However, an “exception” or “loophole” in the IRA

allows high-income taxpayers to benefit from EV tax

credits when leasing instead of buying EVs, and leases

are now half or more of the EV market. This leasing

exception is described in CRS In Focus IF12603, The

Tax Credit Exception for Leased Electric Vehicles.

Hahn et al. (2024) suggest that the environmental benefits

per dollar of EV tax credits are lower than for other climate

subsidies. The researchers find that EV subsidies are least

effective when they include hybrid vehicles and are more

effective when they are limited to BEVs. (The current tax

credits split this difference by including BEVs and plug-in

hybrids while excluding conventional hybrids.)

• The IRA disallowed the CVC for light-duty EVs costing

As a point of comparison, the IRA’s increased spending on

clean electricity tax credits (CETCs) is estimated to have

cost three times as much as increases to the EV tax credits,

while the Rhodium Group found that the CETC changes

would have reduced emissions by 9 to 51 times as much as

the EV credit changes. These findings suggest that the

repeal of the EV tax credits in the OBBBA will have fewer

environmental impacts per dollar of deficit reduction than

the OBBBA’s phaseout of the CETCs, which subsidize

electricity generation from zero-emissions sources such as

solar, wind, nuclear, and geothermal power.

Another change enacted by the IRA was the creation of the

CQCCV. The interaction of the CQCCV and the CVC

allows for the leased EVs loophole, which is regressive, but

comprehensive analyses of the credit’s total distributional

impact have not been published to date.

Distributional Effects

Economic theory suggests that the people benefiting from

tax credits are not always the people who receive them. For

example, if the government creates a new $1,000 tax credit

for buying EVs, and if this credit increases demand for EVs

such that car dealers are able to raise prices by $700, then

consumers are only $300 better off. On paper, it appears

that consumers receive a $1,000 EV tax credit, but

economists would note that consumers receive 30% of the

credit’s incidence, whereas car dealers receive 70%.

more than $55,000 and for heavy-duty EVs costing

more than $80,000—the types of higher-priced EVs that

may be bought disproportionately by affluent taxpayers.

These restrictions are easily evaded due to the exception

for leased vehicles described above.

Two changes have been more unambiguously progressive.

First, IRS regulations made the CVC and UCVC fully

refundable starting in 2024, so long as taxpayers “transfer”

the tax credits to car dealers in exchange for a cash payment

or a reduced price on the vehicle. In effect, this allowed

low- and middle-income EV purchasers to reap the full

value of EV tax credits, whereas previously their credits

could not exceed their income tax liabilities. Second, the

price differential between gas-powered cars and EVs has

narrowed in recent years. This may have increased EV

purchases among low- and middle-income taxpayers.

Nicholas E. Buffie, Analyst in Public Finance

IF13089

https://crsreports.congress.gov

Economic Perspectives on Electric Vehicle Tax Credits

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