By: Jimmy Brown
While consumer interest in electric vehicles is on the incline, up 10% in the last year, Kentucky is out of fuel at the bottom of the hill.[i]
Kentucky is breaking ground on a $2 billion state-of-the-art electric vehicle battery Gigafactory in Bowling Green, Kentucky, which will soon make the state a leader in global electric vehicle manufacturing.[ii] This operation is expected to power up to 300,000 vehicles annually by 2027.[iii] Kentucky will then have 2,000 full-time employees with a personal interest in the sale and production of EVs.[iv] When asked about the factory, Governor Andy Beshear said, “. . . it solidified Kentucky’s place as the leader in the emerging electric vehicle sector.”[v] However, the Commonwealth remains behind in electric vehicle adoption.[vi]
Over forty-five states currently provide an incentive for certain electric vehicles through a specific state utility or legislation.[vii] Kentucky is one of the five states that does not have any laws or policies that would impact the buying of an EV or the building of electric vehicle supply equipment.[viii] While EVs can be more affordable in the long run–no gas or oil changes–the initial investment is high; the average EV costs $56,437.[ix] This number is significant because Kentucky is among the ten states with the lowest household salaries in the United States.[x] Therefore, if the citizens of Kentucky want to purchase an EV, whether to combat rising gas prices or lower greenhouse gas emissions (GHGs), some financial assistance is necessary.[xi]
The incentives offered by other states include tax credits, rebates, registration fee reductions, parking incentives, and utility rate reductions.[xii] These incentives allow citizens of other states to combat the high upfront cost of EVs and can be used alongside a $7,500 federal tax credit.[xiii] Some may see this federal tax credit and think Kentucky should not assist with the cost of EVs. However, due to the recent Inflation Reduction Act (IRA), the $7,500 credit is far from guaranteed.[xiv] While the IRA does eliminate the previous 200,000-unit manufacturer vehicle sales caps, allowing large EV companies like Tesla and General Motors to be re-eligible for the tax credit, other significant limitations could bar someone from receiving the tax credit.[xv] For example, the IRA requires that qualifying vehicles must have their final assembly in North America, increasing percentages of battery materials and components must be sourced from the U.S. or one of its free-trade partners, and eligibility limits based on the price of the vehicle and the taxpayers modified adjusted gross income.[xvi] The most vital of these limitations is the increasing battery materials and components percentage-sourcing requirements.
Instead of the previous method—the size of the battery dictating how much of a credit the taxpayer receives—the $7,500 credit will now be split into halves depending on the critical battery materials and components.[xvii] To qualify for the $3,750 allocated to critical battery materials, at least 40% of the battery must have been either recycled in the U.S. or extracted/processed there (or in any country that has a free trade agreement with the U.S.).[xviii] After that, the required percentage increases by 10% each year until it reaches 80% in 2027.[xix] Similarly, to receive the remaining $3,750 credit in 2023, at least 50% of the EV's battery components must be manufactured or assembled in the U.S. (or in any country that has a free-trade agreement with the U.S.).[xx] After that, the percentage increases 10% each year until it reaches 100% in 2029.[xxi] Therefore, a vehicle will not be eligible to receive the tax credit if any of the battery components were sourced from a “foreign entity of concern,” such as China, Russia, Iran, and North Korea.[xxii] This is a viable concern because China has produced 44% of the world's EVs in the last decade and around 80% of the world’s lithium-ion batteries.[xxiii]
The policy behind the IRA is admirable: promoting the production/sale of EVs and strengthening our position in the regional EV supply chain.[xxiv] However, in the coming years, while companies work to decrease their reliance on foreign battery producers, it will keep individuals from receiving the federal tax credit.[xxv]
More EV purchases would have a greater impact than just helping Kentuckians. According to the U.S. Energy Information Administration, 90% of the total U.S. transportation sector is powered by petroleum.[xxvi] The transportation sector is responsible for 27% of the GHGs in the U.S.; the largest sources of GHGs are passenger cars, medium/heavy-duty trucks, and light-duty trucks (sport utility vehicles, pickup trucks, and minivans).[xxvii] These sources account for over 50% of the GHGs from the transportation sector.[xxviii] Electric vehicles (EVs) typically have a smaller carbon footprint than their petroleum-powered counterparts because they have no tailpipe emissions.[xxix] Even after accounting for the electricity emissions used to produce EVs, research shows that an EV is responsible for lower levels of greenhouse gases than an average new gasoline car.[xxx]
To further EV adoption in the state, Kentucky should offer a tax credit for citizens who purchase an EV or provide electrical supply equipment. A tax credit should be used over a tax deduction because a tax credit will reduce the tax bill dollar-for-dollar and counts towards a refund, while a tax deduction lowers your taxable income based on your income tax bracket.[xxxi] A tax deduction generally benefits individuals with higher incomes because the marginal tax system increases tax rates as income rises.[xxxii] Therefore, a tax credit would be the most beneficial incentive for Kentucky residents.
In summary, given the rising interest in EVs, the current transportation sector’s negative effects on the environment, the uncertainty of receiving a federal tax incentive, the high upfront cost of EVs, and the scope of the state’s new business venture, if Kentucky wants to become a leader in the EV sector, there should be a tax credit afforded to residents who purchase an electric vehicle or provide electric vehicle supply equipment.[xxxiii]
[i] Dan Zukowski, Interest in EVs has Grown Substantially, survey shows, Util. Dive (July 8, 2022), https://www.utilitydive.com/news/consumers-ready-buy-electric-vehicle-today-survey/626829/ [perma.cc/S758-EEXH].
[ii] Brandon Mattingly, Gov. Beshear, Envision AESC Break Ground on Electric Vehicle Battery Factory in Bowling Green, Team Ky.: Cabinet for Econ. Dev. (Aug. 30, 2022), https://ced.ky.gov/Newsroom/NewsPage/20220830_EnvisionAESCGroundbreaking [https://perma.cc/5WX4-QBPQ].
[iii] Id.
[iv] See id.
[v] Id.
[vi] Id.
[vii] Kristy Hartman & Laura Shields, State Policies Promoting Hybrid and Electric Vehicles, Nat’l Conf. of State Legislatures (Apr. 26, 2022) https://www.ncsl.org/research/energy/state-electric-vehicle-incentives-state-chart.aspx#incentives [https://perma.cc/7PN5-UEAC].
[viii] Id.
[ix] Mike Winters, Here’s whether it’s actually cheaper to switch to an electric vehicle or not – and how the costs break down, CNBC (Dec. 29, 2021, 11:41 AM), https://www.cnbc.com/2021/12/29/electric-vehicles-are-becoming-more-affordable-amid-spiking-gas-prices.html [https://perma.cc/NF4M-FX4A].
[x] Average Income by State 2022, World Population Rev., https://worldpopulationreview.com/state-rankings/average-income-by-state (last visited Sept. 29, 2022) [https://perma.cc/6JNV-7JDU].
[xi] See Adam Raymond, The Electric Vehicle Industry is Booming in Kentucky, Spectrum News 1 (Jan. 31, 2022, 5:57 PM), https://spectrumnews1.com/ky/louisville/news/2022/01/31/the-ev-industry-is-booming-in-kentucky--will-ownership-follow- [https://perma.cc/4VFQ-WX9R].
[xii] Id.
[xiii] Id.
[xiv] Ronald Montoya, Electric Vehicle Tax Credits: What You Need to Know, Edmunds (Sept. 8, 2022), https://www.edmunds.com/fuel-economy/the-ins-and-outs-of-electric-vehicle-tax-credits.html [https://perma.cc/VEP9-Z2K2].
[xv] Id.
[xvi] Id.
[xvii] Id.
[xviii] Id.
[xix] Montoya, supra note 14.
[xx] Id.
[xxi] Id.
[xxii] Jael Holzman, How Manchin kneecapped the climate bill’s EV tax credit, E & E Daily (Aug. 8, 2022, 6:11 AM), https://www.eenews.net/articles/how-manchin-kneecapped-the-climate-bills-ev-tax-credit/#:~:text=The%20legislation%20would%20also%20prohibit%20tax%20credits%20from,%E2%80%94%20a%20label%20that%20could%20cover%20Chinese%20resources. [https://perma.cc/R65K-N4F7].
[xxiii] Montoya, supra note 14.
[xxiv] Id.
[xxv] See id.
[xxvi] Use of Energy Explained, U.S. Energy Info. Admin., https://www.eia.gov/energyexplained/use-of-energy/transportation.php#:~:text=Petroleum%20is%20the%20main%20source,in%20natural%20gas%20pipeline%20compressors (last updated June 17, 2022) [https://perma.cc/MRR4-Y5AX].
[xxvii] Sources of Greenhouse Gas Emissions, U.S. Env’t Prot. Agency, https://www.epa.gov/ghgemissions/sources-greenhouse-gas-emissions (last updated Aug. 5, 2022) [https://perma.cc/73MW-HHC9].
[xxviii] Id.
[xxix] Electric Vehicle Myths, U.S. Env’t Prot. Agency, https://www.epa.gov/greenvehicles/electric-vehicle-myths (last updated Sept. 27, 2022) [https://perma.cc/A9KN-53H3].
[xxx] Id.
[xxxi] Evelyn Waugh, Tax Credit vs. Tax Deduction: What’s the Difference?, Experian (Mar. 10, 2022), https://www.experian.com/blogs/ask-experian/tax-credit-vs-tax-deduction-whats-the-difference/ [https://perma.cc/V2YE-4CZG].
[xxxii] Id.
[xxxiii] Mattingly, supra note 2.