Toyota Facing End Of the Road on EV Tax Credits

(Bloomberg) -- Toyota Motor Corp. is inching closer to using up a key U.S. tax credit for hybrid and electric vehicles, a milestone the automaker argues will raise its costs and hinder adoption of climate-friendly cars.

Current law allows automakers to offer a $7,500 tax credit to buyers of fully or partly electric cars, but only up to 200,000 per company. Demand for Toyota's plug-in hybrid vehicles has steadily grown, especially as gasoline prices have surged past $4 a gallon, pushing up its cumulative sales of eligible vehicles to 183,000 as of the end of 2021, according to an analysis by BloombergNEF. The company reported sales of another 8,421 plug-in hybrid and electric cars in the first quarter.

The Japanese manufacturer, which has been at the center of a debate in Washington over whether extra tax credits should be extended to unionized carmakers, is poised to become the third manufacturer to hit the limit, joining General Motors Co. and Tesla Inc. Toyota executives have said they are planning for their share of credits to run out as soon as this summer.

“We're planning for it, because Tesla's out, and General Motors is out, and we'll be out probably in the second quarter,” Bob Carter, Toyota Motor North America's executive vice president of sales, said in a recent interview. “When you're out, you enter a step-down phase down, so we're planning for that.”

The automaker has joined its rivals in lobbying for an extension of the cap, but Toyota and Tesla have vocally opposed an effort by the Biden administration to offer an additional $4,500 in credits to unionized carmakers, a position favored by GM, Ford Motor Co. and Stellantis NV.

Democratic Senator Joe Manchin, a swing vote and lynchpin for such an extension, on April 28 called the White House's current proposal to expand the popular tax credit “ludicrous,” noting a large existing backlog of orders for EVs and other vehicles as carmakers wrangle with shortages of critical parts.

Gradual Phase-Out

Absent Congressional action in the near future, Toyota faces a wind-down period that would halve the value of its credits every six months until hitting zero. The phase-out process starts two quarters after the cap is reached, meaning Toyota's credit could be reduced to $3,750 as soon as Jan. 1, 2023. Toyota could have no more credits to offer car buyers as soon as next October.

Toyota dealers have prioritized sales of increasingly popular hybrid models, which now make up more than a quarter of the company's U.S. sales volume. Demand for the gas-electric version of the brand's top selling vehicle -- the RAV4 compact SUV -- rose by double digits last quarter.

Carter said Toyota has considered lowering the price of its new EVs to compensate for the looming loss of the federal tax credit.

Nissan Motor Corp. and Ford Motor Co. are the next nearest manufacturers close to tapping out on credits. The Japanese company has sold 166,000 electrified vehicles as of the end of 2021, followed by Ford's 157,000.

Carmakers sold a record 657,000 hybrid or all-electric cars in 2021, according to an analysis by BloombergNEF. While that accounted for only 4.4% of new car sales, it was double the level of a year earlier. Analysts say they see no sign of that growth halting anytime soon, even without the full federal credit for some brands.

“We have seen quarter-by-quarter increase in shopping for EVs and hybrids” since the fourth quarter of 2020, Michelle Krebs, executive analyst at Cox Automotive, which conducts market research for auto dealers, said in an email.