Leasing Loophole: How U.S. EV Policy Spurs a Surge in Subsidized Imports and Luxury EVs

A loophole in the US electric vehicle policy is providing subsidies for imported models, leading to a surge in leasing options. Those in the market for a high-end electric vehicle or one manufactured abroad might find that leasing offers more appealing financial incentives compared to traditional purchasing plans.

The reason can be attributed to the actions of the authorities, specifically the U.S. Treasury Department, which chose to apply the subsidies provided by the Inflation Reduction Act in a manner that, according to certain legislators, strays from the law's initial purpose.

The financial incentives boosting consumer EV leases are provided by the Commercial Clean Vehicle Credit, also known as IRS 45W, which was made possible through the IRA. This initiative was initially designed to offer commercial fleet operators a financial benefit for switching to electric vehicles. However, the actual wording was adjusted so that car manufacturers' affiliated financing branches could extend this credit to electric vehicles that are leased out to individual customers.

Almost all electric vehicles are eligible for this type of rebate when leased, whereas only a limited range of electric vehicles are applicable for purchase rebates. Consequently, it's no shock that leasing is becoming more popular compared to buying—with electric vehicles being the primary force behind this increase rather than their non-electric counterparts.

Yearly lease rates for electric vehicles according to Trans

Government financing is contributing to a rise in electric vehicle leases

According to recent data released by the financial behemoth TransUnion, the uptick in electric vehicle (EV) leases has been a significant factor in the increase of total lease numbers, which soared from 539,000 in the first quarter of 2023 to 714,000 in the third quarter of 2024. These figures are nearing those recorded back in 2020 when borrowing costs were notably less.

Satyan Merchant, who holds the position of senior vice president for the automotive and mortgage sectors at TransUnion, points out that the increase in affordable electric vehicles (EVs) has been influential. Moreover, the initiation of leasing deals stimulated by federal tax credits, which effectively reduce the cost of EV leases, came into effect at the beginning of January 2023.

In relation to passenger cars, the IRS 45W regulation has effectively allowed car manufacturers to anticipate a rebate of as much as $7,500 for each electric vehicle (EV) they lease. This benefit applies no matter where the vehicle was built, where its battery components come from, or how expensive the car is. It also isn't influenced by the income level of the person leasing the EV. Moreover, there's no cap on the amount of credits a carmaker—or the leasing entity—can apply for when leasing vehicles, nor is there a restriction on the quantity of EV leases backed by the federal government that a consumer can sign up for.

Leasing has become a more attractive option for acquiring high-end and foreign electric vehicles due to IRS 30D, the Clean Vehicle Credit focusing on reasonably priced EVs manufactured in the U.S. with battery components sourced from North America or allied trade nations. To be eligible for the EV tax incentive, which can be as much as $7,500, purchasers need to comply with specific income limits for their household, and the vehicles must adhere to standards regarding assembly in the U.S., origin of EV battery materials, and a maximum price of either $55,000 or $80,000 based on the type of vehicle.

2024 Model of Ford's Mustang Mach-E GT

Leasing has gained significant momentum across the automotive industry recently, with a particularly sharp increase observed in the electric vehicle sector. Merchant notes that when it comes to obtaining a new electric vehicle, consumers are now favoring leasing over traditional financing methods.

The latest insights from TransUnion reveal significant changes in the leasing sector, particularly with the rise of electric vehicles. This observation aligns with Experian, another major credit agency, which also recognized a trend towards electric vehicle leases beginning to take hold in April 2023.

This creates a somewhat contradictory situation. The surge in leasing, prompted by the Inflation Reduction Act, could potentially undermine the very encouragement meant for businesses to expand the electric vehicle (EV) supply network and increase the production of EVs within the United States—right as the benefits of the IRA's investment in enhancing domestically produced and sourced EVs are about to be realized.

Sticker indicating United Auto Workers' production on the 2022 Chevrolet Bolt

Is the Biden administration's electric vehicle strategy counterproductive?

The Peterson Institute for International Economics highlighted in a May 2023 working paper on the Inflation Reduction Act that if buyers primarily opt for the tax incentive through leasing as per Section 45W, car manufacturers might not feel the economic push to incorporate battery parts made in the US, utilize recycled batteries, or obtain essential minerals from the US or its free trade allies. The institute noted that since the Act's implementation, there has been a rise in electric vehicle imports from the European Union and South Korea to the US. Consequently, Section 45W could potentially diminish the motivation to establish an independent EV battery supply chain outside of China.

Nonetheless, the strategy has also increased the number of leases for cost-effective electric vehicles manufactured in the U.S. In the previous year, data from Experian highlighted that the Tesla Model 3 ranks among the top ten vehicles most commonly leased in the U.S.

Updated European Version of Tesla Model 3

In the previous year, Green Car Reports made inquiries to most carmaker finance departments and the IRS about how often they filed for 45W deductions in electric vehicle lease financing. The finance companies that replied chose not to disclose this data. We have since made a new request to the IRS and the Treasury Department for current insights to better understand the extent to which finance firms and car manufacturers rely on this financial support.

The Internal Revenue Service refrained from making a statement, instead hinting that the Treasury Department would be the likely provider of the information in question. On Friday, the Treasury Department informed Green Car Reports that it currently lacks comprehensive data for the year 2023 concerning the total claimed under section 45W, the number of vehicles covered by these claims, or the specific purposes for which these vehicles are utilized.

For now, it's expected that the electric vehicle leasing sector for customers will keep receiving government financial support until the legislative body intervenes to establish regulations. Therefore, these financially assisted leases for electric vehicles will persist at least until the next legislative session. Like many aspects of the existing electric vehicle policies and the political campaign period, this situation is prone to alterations.

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