J.D. Power: Inflation Reduction Act Reshapes EV Landscape
The Inflation Reduction Act of 2022 introduced a host of incentives and programs that will affect the demand dynamics for electric vehicles (EVs). The new law is not only rearranging who the front-runners are in the EV standings, but may also bring new demographic segments of the population into the market.
To discuss the Act’s strategic, operational, financial and technological implications for the EV industry, we caught up with Elizabeth Krear, Vice President, Electric Vehicles, J.D. Power. Here is what she had to say:
Q: What elements of the Inflation Reduction Act affect the EV market?
Elizabeth Krear, J.D. Power
Elizabeth Krear: It is a major development that will have a seismic effect on the industry. That said, it is important to keep in mind that the dust has not yet settled on legislative initiatives that will affect the market dynamics of EVs. There are already requests from the industry to tweak and adjust elements of the Act. For instance, if enacted as written, it will suppress EV sales because of the North American supply chain criteria in the language. Still, a couple of basic trajectories have been set that will carry long-term implications on both the supply and demand side of the equation.
The first, and perhaps most obvious, is the clear effort by the Act to support domestic EV manufacturing. Vehicles manufactured outside of North America will no longer qualify for the tax incentive.
The second is the effort to democratize demand. To attract “main street” buyers, the Act sets price limits for vehicles -- and income limits for consumers -- to qualify for the tax incentives.
These two factors give the domestic EV market a shot in the arm by using the tax code to change the cost structure and encourage new demographic sectors to participate as buyers. As it is, we are already seeing a significant rise in EV consideration for mass market offerings that parallel dynamics taking place in the internal combustion engine (ICE) market.
New vehicle buyers overwhelmingly purchase SUVs and trucks rather than sedans and other categories of vehicles. Similar trends are beginning to emerge in the EV sector. J.D. Power has noted that among the most considered EVs over the past few months is the Ford F-150 Lightning, accompanied by several other mass market cars and SUVs.
This is a major development. Expensive luxury brands are no longer the top-considered vehicles, after years of accounting for the lion’s share of EV sales. The Act will further incentivize manufacturers in this country to develop EV offerings at a price threshold that will attract a broader range of buyers.
Q: How are tax incentives included in the Inflation Reduction Act affecting EV standings. Will it have an influence on who the winners and losers will be?
Krear: That is a definite possibility. The act offers a second bite at the apple for some of the early EV OEMs in the U.S. For those that no longer qualify for previous tax incentives because manufacturers passed the original 200,000-unit sales cap, the Act offers an opportunity to introduce EVs at price-points that will help new, less affluent, buyers take advantage of income threshold-based tax credits. It opens the door for established EV players to continue capturing market share for sedans priced under $55,000 or trucks and SUVs priced at less than $80,000.
Under this new legislation, the popular Ford F-150 Lightning -- with prices starting at roughly $47,000 -- will never experience a volume cap. F-150 Lightning customers will be able to put $7,500 in their pockets for trim options that cost less than $80,000. That said, less than half of F-150 Lightning sales currently fall beneath this threshold. Consequently, automakers are already reconsidering new pricing and launch strategies.
Another example is the Chevy Bolt, which rounded out the top ten considered EVs in August according to J.D. Power. Chevy announced a $5,900 price cut for the 2023 model in July. When this is coupled with the $7,500 tax credit at the point of sale, customers who meet the income criteria stand to realize over $13,000 in savings. These are major shifts in the EV affordability equation. It is reshaping EV standings. In August, for instance, the top three EV SUVs considered by new-vehicle shoppers were the Toyota bZ4X, Chevy Blazer EV and Ford Mustang Mach-E.
Ford was approaching the manufacturer's cap limit. The Inflation Reduction Act changes the equation dramatically. It effectively extends tax incentives for Ford and Chevy while depriving the bZ4X of any tax incentives due to the manufacturer's origin provision in the law.
Q: Are there challenges or issues regarding the income level cutoff for customers?
Krear: The Act sets specific income thresholds for tax incentive eligibility. Eligible buyers must make less than $150,000 if their tax filing status is “single” and earn under $300,000 if married and filing jointly.
This is a big deal. In August, data from the 2022 U.S. Electric Vehicle Consideration (EVC) Study indicated that 26% of all new vehicle shoppers would likely consider buying or leasing an EV in the next 12 months. EVC further shows more than 90% of these likely shoppers have household income thresholds below the specified limits of the new bill, making them eligible to receive the tax credit.
When reviewing insights from the 2022 Electric Vehicle Experience (EVX) Ownership Study, we also see that incentives matter more to consumers who earn less. Only 21% of premium vehicle owners stated that tax credits or incentives were a fundamental reason for buying their vehicle. For mass-market buyers that number almost triples to 58%.
Furthermore, by offering the tax credit at the point of sale, eligible consumers can immediately take full advantage of the incentive. It is not dependent on their end-of-year tax liability. The bottom line is that price is a major factor for both the consideration process and the ownership experience. A monthly survey by J.D. Power of over 2000 new car shoppers finds that EV purchase consideration has increased month over month among shoppers making $100,000 to $200,000 per year. It dropped, however, among shoppers making less than $100,000. The number one reason for EV rejection: price.
Meanwhile the 2022 U.S. Electric Vehicle Experience (EVX) Ownership Study from J.D. Power finds 54% of mass-market owners citing cost as a fundamental driver of their decision-making process. It reinforces the fact that main-street consumers are price conscious.
Q: How is the dealership community responding to the opportunities -- and challenges -- associated with bringing EVs to market?
Krear: Where dealers do business -- and the demographic makeup of the communities -- will be a major factor in whether the provisions of the Inflation Reduction Act enhances their ability to move EVs. It also illustrates how different it is going to be for sales teams to sell EVs compared to ICE offerings. It introduces factors that complicate how information about EVs are presented to consumers.
That is why the biggest challenge facing dealerships -- over the short, mid and even long-term time horizons -- is education. There are aspects of the EV buying experience that are complicated and confusing to consumers. The Act adds even more nuances to navigate.
That is why 30% of EV rejectors cite a lack of information as a barrier to adoption. Dealers and OEMs have a lot of work ahead of them to provide detailed information about EV ownership in a way that is meaningful to consumers. The most important variable for the industry to shed light on is the true cost of EV ownership. And here is where state and local regulatory and market environments come into play. The total cost of ownership ends up changing dramatically as you move from one part of the country to the other.
State incentives vary greatly from state to state. For instance, in New Jersey, EV purchases carry zero state sales tax. By contrast, in Georgia, EV registration fees are higher than those for ICE vehicles. These are issues that simply do not exist in the ICE world. It is an area, however, that dealerships will have to master if they want to succeed in the EV space.
Additionally, different communities offer local utility incentives for EV ownership, including rebates for home charger installations. It will be important for consumers to understand how and when to charge their vehicles based on the cost of electricity through different parts of the day. Finally, the maintenance and residual value profiles for EVs are significantly different to those of ICE vehicles. It all adds up to a complicated equation that dealerships will have to help EV consumers solve.
The good news is that J.D. Power has unique tools and data available to access and understand the dynamics that affect the true cost of ownership; for specific customers buying specific EVs in specific markets, providing dealerships -- and OEMs -- clarity that will support effective EV buying decisions.
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