Finance

The Inflation Reduction Act has a few provisions related to tax credits for electric vehicles.
Consumers can get a $7,500 tax credit for buying a new EV. It may be challenging for cars and/or buyers to qualify due to certain requirements.
It may be easier to get a $7,500 credit by leasing an EV. Leases aren’t subject to the same rules.
Automakers may pass along the tax credit by lowering monthly payments.

Maskot | Maskot | Getty Images

Buying a new electric vehicle isn’t the only way consumers can access a $7,500 federal EV tax credit. They may also be able to get the money by leasing a car.
The Inflation Reduction Act, which President Joe Biden signed in 2022, contained various rules related to consumer tax breaks for EVs.

Perhaps the best known of them — the “new clean vehicle” tax credit — is a $7,500 tax break for consumers who buy a new EV. Most qualifying buyers opt to get those funds directly from the car dealer at time of purchase.  
But many auto dealers are also passing along a $7,500 tax break to lessees, via a different (and, experts say, lesser-known) mechanism called the “qualified commercial clean vehicles” tax credit.

The upshot for consumers: It’s far easier to get than the credit for buyers of new EVs, since it doesn’t carry requirements tied to car manufacturing, sticker price or buyers’ income, for example, experts said.
In other words, the $7,500 may be available for lessees but not for buyers.
This EV tax credit “leasing loophole” has likely been a key driver of increased leasing uptake in 2024, Barclays auto analysts said in an equity research note published in June.

About 35% of new EVs were leased in the first quarter of 2024, up from 12% in 2023, according to Experian.
“Want a good deal on buying a car today? Your best bet may be leasing an EV,” Barclays said.

What is the EV leasing loophole?

Praetorianphoto | E+ | Getty Images

Receipt of the full new clean vehicle credit — Section 30D of the tax code — is conditioned on certain requirements for vehicles and buyers.
For example, final assembly of the EV must occur in North America. Battery components and minerals also carry various sourcing and manufacturing rules. Cars must not exceed a certain sticker price: $55,000 for sedans and $80,000 for SUVs, for example.
As a result, not all EVs qualify for a tax credit. Some are eligible, but only for half ($3,750).
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Thirteen manufacturers make models currently eligible for a tax break, according to the U.S. Energy Department. That list is expected to grow over time as automakers shift production to comply with the new rules.
To qualify for the tax break, buyers’ annual income also can’t exceed certain thresholds: $300,000 for married couples filing a joint tax return or $150,000 for single filers, for example.
But consumers can sidestep these requirements by leasing.

That’s because leasing is qualified as a commercial sale under the Inflation Reduction Act, according to Barclays. With a lease, the carmaker technically sells the vehicle to a leasing partner, which is the one transacting with consumers.
The U.S. Treasury Department issues the tax credit — offered via Section 45W of the tax code — to the leasing partner, which may then pass on the savings to lessees.

Dealers aren’t obligated to pass on savings

The catch is, they don’t have to pass on savings to drivers, experts said.
It seems “a ton” are doing so at the moment, though, said Ingrid Malmgren, senior policy director at Plug In America.
The $7,500 tax credit enables dealers to charge low monthly payments for leases, thereby helping “stoke demand” for EVs, Barclays wrote. In 2024, dealers have leaned more heavily on such leasing promotions, in the form of subsidized monthly payments, analysts said.  
Foreign automakers that struggle to meet the Inflation Reduction Act’s domestic manufacturing requirements are among those doing so.

“Greater EV ambitions from Asian [car manufacturers] such as Toyota and Hyundai Kia also heavily utilize the leasing loophole as their production outside of North America limits their ability to qualify for the consumer credit, but not the commercial credit,” Barclays wrote.
Brian Moody, executive editor of Autotrader, a car shopping site, expects the majority, if not all dealers, to pass along tax break savings to remain competitive.
“It’s unlikely you’d go lease one and not get the advantage,” Moody said.

EV leasing considerations for consumers

Consumers may consider doing the rough math on leasing versus buying before making an ultimate choice, including tallying potential tax breaks, interest costs, total car payments and resale value, experts said.
While leases are generally (though not always) more expensive than buying, leasing carries nonfinancial benefits, too, Malmgren said.
For example, leasing ensures car users always have a new vehicle, and also offers “a great glide path” for consumers to determine whether EVs are right for them, without much risk, she said.
Buyers waiting for “next-generation EVs” from certain carmakers around 2026 to 2028 can “maintain flexibility,” while also providing a benefit to those “wary of technological obsolescence given the rapid pace of EV/software-defined vehicle development,” Barclays wrote.

That said, it may be more complicated for consumers to untangle how dealers are passing along a tax credit to EV lessees relative to buyers, experts said.
“I think leases are a little bit of a shell game,” Malmgren said. “There are many variables that factor into your payment” that dealers can tweak in a lease contract.
She encourages consumers to get a printout of everything included in the lease to make sure the $7,500 tax credit is reflected in the pricing.
“Quite frankly, I’d just ask upfront,” Moody said. “And it should be spelled out in the [lease] documents, too.”
If it’s not easy to understand, consumers should consider moving on to another dealer, he added.

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European Central Bank President Christine Lagarde is giving a press conference following the bank’s latest monetary policy decision. The central bank left interest rates unchanged on Thursday, after implementing a cut in June.

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Presidential hopeful Donald Trump’s new running mate JD Vance stuck to a hard line on China in his first speech since being selected earlier in the week.
“Together we will protect the wages of American workers and stop the Chinese Communist Party from building their middle class on the backs of American citizens,” Vance said on the third night of the Republican National Convention.
China’s middle-income group had a per capita disposable income of 32,195 yuan ($4,436) last year, according to official data.

Relations between Washington and Beijing are at their lowest in decades amid disputes over trade, technology, human rights and China’s increasingly aggressive approach toward its territorial claims involving self-governing Taiwan and the South China Sea.
Jason Lee | Reuters

BEIJING — U.S. presidential hopeful Donald Trump’s new running mate JD Vance stuck to a hard line on China in his first speech since being selected earlier in the week.
“Together we will protect the wages of American workers and stop the Chinese Communist Party from building their middle class on the backs of American citizens,” Vance said on the third night of the Republican National Convention.

He also called for more factories in the U.S. and restrictions on foreign workers, but did not name specific actions.
Vance, a former critic of Trump, rose to fame for his book “Hillbilly Elegy” — a first-hand account that seeks to describe the impact on the U.S. economy as manufacturing shifted out of the country. As the current Ohio Senator, Vance proposed in September a legislation for promoting gas and hybrid-powered cars made in the U.S. and canceling electric car subsidies.
The ruling Communist Party of China has been increasingly focused on developing advanced manufacturing and said one of its goals for the year 2035 is to “substantially grow the middle-income group as a share of the total population.”

China has 1.4 billion people, more than four times the U.S. population of 336.7 million. McKinsey predicts the number of China’s upper-middle and high-income households could reach 200 million next year.
However, China remains far poorer than the U.S. on a per capita basis.

China’s middle-income group had a per capita disposable income of 32,195 yuan ($4,436) last year, slightly lower than the nationwide level of 39,218 yuan, according to the National Bureau of Statistics. The bureau defined each income category by dividing all surveyed households into five equal parts, including upper-middle-income, middle-income and lower-middle income groups.
Per capita disposable income across the U.S. was multiples higher at $61,033 as of December, according to U.S. Bureau of Economic Analysis data.
When looking at the U.S. middle class, median income was $106,100 in 2022, according to Pew Research.
But the share of Americans that were considered middle class fell to 51% in 2023, down from 61% in 1971, Pew said. The share of upper-income Americans grew by slightly more than that of the lower-income segment during that time, the research showed.
Vance in his speech criticized Wall Street and “cheap foreign goods” from China. He also blamed China for the fentanyl crisis.
Since joining the World Trade Organization in 2001, China has increased its role in global supply chains. Many of the world’s largest companies have relied on lower-cost manufacturing hubs in China for supplies.
Trump has said he plans to raise tariffs on Chinese goods to 60% if reelected in fall. He increased duties on Chinese products when he was president about six years ago, and the Biden administration left them intact.
Vance told Fox News earlier this week that instead of the war in Ukraine, China was the “real issue” for the U.S. and posed the “biggest threat.”
Asked about Vance’s comment, China’s Ministry of Foreign Affairs spokesperson Lin Jian said Tuesday at a daily press briefing, “We are always opposed to making China an issue in U.S. elections.”
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Keeping with statements from other policymakers, Waller’s sentiments point to an unlikelihood of a rate cut when the Federal Open Market Committee meets later this month, but a stronger likelihood of a move in September.
Central bankers have become more optimistic from data in recent months that has shown inflation easing after a surprisingly higher move for the first three months in 2024.

Federal Reserve Board Governor Christopher Waller poses before a speech at the San Francisco Fed, in San Francisco, California, U.S., March 31, 2023. 
Ann Saphir | Reuters

Federal Reserve Governor Christopher Waller on Wednesday suggested that interest rate cuts are ahead soon as long as there are no major surprises on inflation and employment.
“I believe current data are consistent with achieving a soft landing, and I will be looking for data over the next couple months to buttress this view,” Waller said in remarks for a program at the Kansas City Fed. “So, while I don’t believe we have reached our final destination, I do believe we are getting closer to the time when a cut in the policy rate is warranted.”

Keeping with statements from other policymakers, Waller’s sentiments point to an unlikelihood of a rate cut when the Federal Open Market Committee meets later this month, but a stronger likelihood of a move in September.
Central bankers have become more optimistic from data in recent months that has shown inflation easing after a surprisingly higher move for the first three months in 2024.
Waller outlined three potential scenarios in the days ahead: One, in which the inflation data turns even more positive and justifies a rate cut in “the not too distant future”; a second in which the data fluctuates but still points toward moderation; and a third in which inflation turns higher and forces the Fed into a tighter policy stance.
Of the three, he considers the third scenario of unexpectedly stronger inflation as the least likely.
“Given that I believe the first two scenarios have the highest probability of occurring, I believe the time to lower the policy rate is drawing closer,” Waller said.

However, he noted that while financial markets focus strongly on the date the Fed might move on a cut, FOMC members do not.
“Assuming there’s not a big shot to the economy, from a macro perspective it doesn’t really matter that much,” Waller said. “It’s not a particular meeting, it’s when do we think conditions are right to go.”
Waller’s comments on Wednesday are of particular note because he has been among the more hawkish FOMC members this year, or those who have advocated for tighter monetary policy as fears escalated that inflation is proving more durable than expected.
In May, Waller told CNBC that he expected cuts to be “several months away” as he awaited more convincing data that inflation was receding. His speech Wednesday indicated that the threshold is close to being met.
For one, he said the labor market “is in a sweet spot” in which payrolls are expanding while wage gains are cooling. At the same time, the consumer price index declined 0.1% in June, while the 3.3% annual rate for core prices was the lowest since April 2021.
“After disappointing data to begin 2024, we now have a couple of months of data that I view as being more consistent with the steady progress we saw last year in reducing inflation, and also consistent with the FOMC’s price stability goal,” he said. “The evidence is mounting that the first quarter inflation data may have been an aberration and that the effects of tighter monetary policy have corralled high inflation.”
The comments also are consistent with what New York Fed President John Williams told The Wall Street Journal in an interview published Wednesday. Williams noted that inflation data is “all moving in the right direction and doing that pretty consistently” and is “getting us closer to a disinflationary trend that we’re looking for.”
Markets again are pricing in a more accommodative Fed.
Traders in the fed funds futures market are pricing in an initial quarter percentage point rate cut in September followed by at least one more before the end of the year, according to the CME Group’s FedWatch measure.
Fed funds futures contracts currently are implying a 4.62% rate at the end of the year, about 0.6 percentage point below the current level.

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