Electric Vehicles: Expansion of Tax Credits for EVs
Democrats have proposed an expansion of the tax credit for the purchase of some electronic vehicles (EVs). This credit is part of President Biden’s goals of increasing the percentage of EVs on the road and boosting U.S. union jobs. Overview of the tax credits The proposed EV tax credits would provide buyers of EVs made in the U.S. by union labor with a credit of $12,500. Buyers of EVs manufactured elsewhere would receive a $7,500 credit which is unchanged. If the vehicle’s battery is made in the U.S. these buyers would receive an additional $500 credit. As you might imagine, Elon Musk and other manufactures whose vehicles don’t qualify for the maximum credit are upset by this proposal. The credits would last for 10 years and allow buyers to deduct the value of the credit from the EV’s sale price at the time of purchase. Initial estimates of the cost of the credit over ten years were in the $33 to $34 billion range. The Joint Committee on Taxation subsequently revised that estimate to $15.6 billion. Overview of Tax Credit As mentioned above, the proposed tax credit would be $12,500 for EVs made in the U.S. with union labor. EVs manufactured elsewhere and/or with non-union labor would qualify for a $7,500 credit with the opportunity for an additional $500 credit if the battery is made in the U.S with union labor. Taxpayers with an adjusted gross income that is no higher $400,000 would be eligible for the proposed credit. The credit would be limited to cars priced at more than $55,000 and trucks priced at no more than $74,000. In addition to a credit for new vehicles, the proposal would add a credit of up to $2,500 for used EVs. The credit would apply to used EVs that are at least two years old and that cost no more than $25,000. Adjusted gross income would be limited to individuals with a maximum AGI of $75,000 and $150,000 for joint filers. The proposed changes to the credit would also remove the phaseout of the credit for companies that have sold over 200,000 EVs, benefiting Tesla and GM. Criticism from automakers While domestic automakers and unions like the credit, those automakers whose vehicles would not be eligible for the full credit have voiced their displeasure. Elon Musk of Tesla has voiced his criticisms as have automakers such as Toyota, Honda, Kia and Nissan oppose the proposed credit as being biased due to the requirement that union labor be used in the manufacturing of the EV. Musk recently tweeted, “This is written by Ford/UAW lobbyists, as they make their electric car in Mexico. Not obvious how this serves American taxpayers.” While some of these automakers have operations in the U.S., their U.S workforce is largely not represented by unions. Ford, GM and Stellantis (formerly Fiat, Chrysler) support this credit as you might expect. “This legislation will help more Americans get into EVs, while at the same time supporting American manufacturing and union jobs,” according to Kuma Gallhotra who is Ford’s president of the Americas and international markets. How will this impact the auto industry? Certainly, the availability of the credit can provide an incentive to care buyers who might be considering an EV and are on the fence. Beyond that, it’s hard to say if the higher credit for the domestic, unionized auto makers will work as intended. A lot of EV buyers have tended to be in higher income brackets and may or may not be eligible for the credits. These buyers often purchase Teslas and other EVs for reasons beyond financial incentives and make their brand choices based on their preferences. Where the incentives could help spur demand is with middle class buyers who might be incented to purchase EVs. To the extent that the automakers can spur demand for their EVs within the broader car buying market, these incentives could be a factor in boosting their EV sales and a boon to their bottom lines. Investors considering buying shares of either the likes of Ford and GM, or Tesla and other EV manufacturers should look at the projected impact of these credits on each company specifically as part of their stock analysis. Looking to build a financial plan based on your goals while considering market trends and risk factors? Click here to check out our approach to Wealth Management. Disclosure These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.
New Tax Hike Proposal: How It Might Affect You
The House Democrats have put forth a series of tax hikes designed to largely cover the cost of the $3.5 trillion spending proposal championed by President Biden. The proposed tax hikes are aimed at wealthy individuals and corporations. Some of the key elements of these proposed tax hikes include: Increasing the top corporate tax rate to 26.5% and the top individual rate to 39.6%. No tax increases on those with incomes less than $400,000. Increases in the capital gains tax rate and a surcharge on those with incomes in excess of $5 million. How will these changes impact you? These changes will impact individual taxpayers in several ways. New tax brackets for individuals Perhaps the biggest change is the increase in the top tax rate to 39.6% for individuals earning $523,000 or above. This is a higher threshold than the $400,000 originally proposed by the president. The top rate on long-term capital gains taxes would be increased from 20% to 25%. The 3.8% Medicare surtax would apply to those in the top bracket for capital gains, in 2021 this is $445,850 for individuals and $501,600 for those who are married and file jointly. This would bring the top rate to 28.8% for these taxpayers. The proposal also calls for a surcharge of 3% on adjusted gross income in excess of $5 million ($2.5 million for those filing married and separately). There is also a proposal to lower the thresholds for estate taxes in 2022, accelerating the sunset provisions in the current tax rules. These and other proposed tax hikes will force those taxpayers who would be impacted to do some tax planning to mitigate the impact of these changes if passed. This might include the timing of income recognition or other tactics. While the increase in the capital gains tax is not as bad as the 39.6% rate proposed by the president, this can still have an impact on investors selling large positions in highly appreciated securities. Increased IRS enforcement Another provision of the Democratic proposals included increasing funding for the IRS to help them increase their enforcement activities. The proposal included an additional $80 billion for the agency. According to some estimates, the top 1% wealthiest Americans have avoided an estimated $163 billion in taxes annually. The funding increase would allow the IRS to collect an additional $200 billion taxes over the next decade according to some estimates, though IRS estimates put this number closer to $700 billion. Much of this enforcement would be directed at “opaque sources of income” used by wealthy taxpayers. According to Treasury Secretary Janet Yellen and IRS Commissioner Charles Rettig the compliance rates for this type of income is only around 50%. Yellen has stated that IRS audit rates would not increase for taxpayers earning under $400,000, only for those earning more than that figure. The proposed rules would also increase reporting requirements by financial institutions regarding certain types of income. Changes to corporate taxes The proposal also includes changes to the corporate tax rates. Under the House proposals the top corporate tax rate would be increased from 21% to 26.5% for corporations earning in excess of $5 million in annual income. The rate for companies earning less than $400,000 in annual income would decline to 18%. The increase on large corporations could be severe and will certainly motivate their corporate tax departments and outside advisors to devise ways to reduce their taxes where possible. These changes could impact the earnings of some corporations and potentially weigh on their share prices. Overall impact The overall impact of these proposals, if passed, will be higher taxes on high income and net worth individuals. The higher corporate taxes could impact earnings for some major corporations. Investors will want to monitor the progress of these proposed changes and any alterations to the legislation that might occur. You will want to stay in contact with your tax advisor and your Wedbush financial advisor to make any changes in your planning or investments that may be warranted. Looking to build a financial plan based on your goals while considering market trends and risk factors? Click here to check out our approach to Wealth Management. Disclosure These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.
ESG Investing: Should ESG Investments Be Part of Your Strategy?
ESG stands for Environment, Social and Governance. Increasingly investment managers and investors of all types are using ESG screens as a metric when deciding on companies to invest in. There are a number of firms providing ESG rankings of not only individual stocks but also for many mutual funds and ETFs. Notable among these rankings are those provided by Morningstar. What is ESG Investing? ESG is an outgrowth of the SRI or socially responsible investing movement. SRI investing selects or eliminates investments that adhere or don’t adhere to certain ethical guidelines. These guidelines could be based on religious beliefs, production of weapons or production of tobacco among others. ESG investing is also a form of SRI but takes a more pragmatic approach to the ESG screens. A company’s performance in areas like environmental, social and governance can be an indicator of the quality of that company’s management. For example, a company that eliminates environmental risks to its business can help improve its bottom line by eliminating the financial costs of an environmental incident both in terms of remediation costs and potential fines from regulators. Why is there a rise in ESG investing? Climate risk is definitely a factor in the increased interest in ESG. Beyond any concerns that investment advisors or investors may have about the impact of climate change on the environment, climate related events can have an impact on the bottom line of many companies. Examples include: Droughts reduce harvest yields on crops. This can impact the suppliers as well as the food production supply chain. Reduced snowfall totals can impact the profits of ski resorts and companies that make ski equipment. Hurricanes and other weather events can destroy buildings and industrial property. The interest in ESG grew in 2020, ESG funds added over $51 billion in assets in 2020, this addition is double the increase from 2019 according to data from Morningstar. In general, the focus on ESG factors grew during 2020, especially as they relate to employee safety and supply chain issues that plagued so many businesses. Benefits & Risks of ESG investing There are both benefits and risks involved with a focus on ESG investing. The benefits include: Companies focusing on governance issues will tend to have fewer management conflicts of interest, broader diversification in their management ranks and in their boards. These are all factors that can lead to a stronger bottom line. Companies focusing on social issues tend to have better employee and shareholder relations efforts, and also focus on employee health and safety. All of these efforts can lead to improved moral and transparency, potentially benefiting the bottom line. Companies focusing on environmental issues tend to avoid issues related to their products causing pollution and likely have a plan to deal with the impact of climate change on their business. The risks can include: According to a study by the Wall Street Journal. The average ESG fund is more volatile than the S&P 500. This could be attributable to a higher level of small cap risk taken on by most ESG funds according to this study. The study also found that many ESG funds can have a concentration risk as the largest holding in a number of ESG funds made up 10% or more of the portfolio. Adhering to ESG principles can lead to a portfolio that may not be as well diversified as might be appropriate for an investor due to ESG investing’s focus on certain market sectors and industries. Opportunities for investors ESG presents opportunities for investors. One such opportunity is investing in green data centers. According to the Global Green Data Center Market Report, green data centers are expected to grow about 19% through 2026 and perhaps beyond. Green data centers use less energy than traditional data centers. The continued growth in the use of data for almost everything, coupled with continued concerns about climate change provides a perfect storm scenario for the growth of green data centers worldwide. As far as incorporating ESG investing into your portfolio there are a few ways to do this. Investing through a fund is one route. There are a number of ESG funds and that number is growing. In going this route, it is important to ensure the fund fits with your overall investing strategy. Individual stocks that fit into some portion of the ESG space are another way to go. Adding ESG screening criteria to your stock selection process can be another screen to consider. It’s important to evaluate any stocks that meet your ESG criteria on their overall fit with your portfolio strategy as well. Contact your Wedbush advisor to discuss ESG investing and how it can fit into your overall investing strategy. Looking to build a financial plan based on your goals while considering market trends and risk factors? Click here to check out our approach to Wealth Management. Disclosure These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.