Why Government Incentives for Used EVs Make No Sense

When the Inflation Reduction Act (IRA) passed last fall, much was made about the revamped electric vehicle tax incentive structure for new car purchases. Specifically that buyers would be eligible for up to a $7,500 rebate. But legislators also added language to the law that would create incentives for used EV sales. Naturally, this facet of the policy was largely ignored. That said, the used car market is typically around double that of new sales, meaning the rules for used EVs outlined in the IRA will have major implications for the country’s transition to an electrified auto fleet…eventually.

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Like much of the IRA’s EV tax rebate system, the used vehicle portion aims to help lower income citizens enter the EV market. It provides tax credits of up to $4,000 for the purchase of a used EV. There are a host of qualifications about the nature of such a sale, but the big one for the purposes of the discussion here is that the vehicle must be sold for less than $25,000.

Which, according to John Helveston, a researcher at George Washington University, who studies electric vehicle pricing incentives, could be a major issue. Helveston says that while this policy rule make sense for the future, when there are plenty of EVs on the road and the market has reached something close to a supply/demand equilibrium, it doesn't address the current used car market. Not only did COVID disrupt automotive supply chains, it also changed how we work and how much we drive. In 2020, Americans bought 15% fewer new cars than in 2019. With the influx of new vehicles, the used car market went through the roof, with the average sale prices up 43% as of July 2022.

The situation for electric vehicles has been even worse. With most manufacturers only starting to release their first or second EV, supply has been incredibly constrained. The wait time for an F-150 Lightning is currently at least a year. If you order a Rivian today, your wait time could range from a few months to several years. This has led to many EV owners deciding to sell their vehicles on the used market for more than the MSRP. Combine all this with the fact that the average new EV is still $66,000, and it quickly becomes apparent just how few used EV sales are going to qualify for the $25,000 ceiling outlined in the Inflation Reduction Act.

Joseph Yoon, a Consumer Analyst at Edmunds, says that the number of used EV sales below $25,000 is so small that the company doesn’t even have good data on it. “It's gonna be very hard to try to find an EV that qualifies,” says Yoon. “It's just kind of where the market is.”

Helveston says it will likely take at least several more years for the used market to swing back towards a supply/demand equilibrium. But once that happens, there’s good reason to expect EV prices to fall fast. He points to the Nissan Leaf as an example. “The first one, just 10 years ago, only had 75 miles [of range], the newest one has over 200 miles.” In other words, Helveston says, “When the newest tech is so much better than last year’s, people want the newer one.”

More to his point, Yoon says that Edmunds is already beginning to see this trend in EV lease prices. “The two biggest things that affect the lease price is residual value, and what the automaker considers the car's going to be worth at the end of the lease term,” says Yoon.

But while most internal combustion engine vehicles are typically worth around 50–60% of their new value after a 3-year lease, the same isn’t true for EVs. “What I'm seeing with a lot of [used] EV lease deals is that they’re getting marked at under 50%.” While this faster-than-usual depreciation may be troubling for EV buyers, it also suggests that there may be relief coming to the used EV market soon.

For now, Yoon says the industry is looking to California to see how things shake out. Used cars tend to be resold in close geographic proximity to where they were originally purchased, meaning the Golden State will also play host to the largest and earliest used EV market in the United States. While the tax incentives in the Inflation Reduction Act don’t currently seem to offer much for used EV purchases, Helveston points out that the policy is aimed at transitioning the country off of fossil fuels over the next two decades, not the next two months. “I don't expect these supply chains to be wrecked forever,” he says. “I think sometime in the next five years, we're gonna see supply ramping up very quickly.”

If he’s right, the IRA’s $25,000 cap may turn out to be a prescient limit that really does help get lower income residents into EVs.