The Dollars and Cents of Electric Cars

Electric cars aren't for everyone...

As I (Brady Holt) shared on Tuesday, electric cars have plenty of range for most folks' everyday commutes, plus some leftover in case you run an errand or get stuck in traffic. But if you take a long road trip, or you're not able to charge up at home, an electric vehicle ("EV") becomes a trickier proposition.

As I said, I'm not here to debate policy. I'm not going to weigh in on whether the government should encourage (much less force) anyone to buy an EV. But I can tell you that if you could handle an EV in your life, the right one should be able to save you money.

In my last issue, I focused on one of the least expensive electric cars in America: the Nissan Leaf, a compact hatchback that's starting price is $28,040. After a $7,500 federal tax credit for plug-in cars – more on that later – that's essentially the same price as a slower, noisier, similarly sized Nissan Sentra.

From there, the Leaf's savings add up quickly... While these costs will vary based on your own driving, your local electricity rates, and your local gas prices, the Environmental Protection Agency ("EPA") projects that it will cost you nearly two and a half timesmore to drive the Sentra than the Leaf (10.5 cents a mile versus 4.2 cents). That's more than a $1,000 difference every 17,000 miles.

EVs also typically cost less to maintain. They don't need oil to lubricate an engine, so they never need oil changes. And their motors incorporate a technology called regenerative braking, which not only captures energy to recharge the battery, but also reduces the wear on your brake pads.

You still need to replace your EV's windshield wiper blades, rotate its tires, and change its air filter. (As with gas cars, automakers recommend specific maintenance schedules that vary by each EV.) But while automotive site Edmunds estimates that the average Leaf would cost $2,481 to maintain for five years, the average Sentra would cost more than twice as much ($5,098).

One big factor is largely unknown, however: how well EV batteries age. Yearly U.S. EV sales topped 100,000 for the first time only eight years ago, so we have few examples of old electric cars to go on. I've seen plenty of anecdotes about long-lasting EVs (and gas-electric hybrid cars)... But I've also seen some EV owners get quoted absurdly high prices to keep their old electric cars on the road.

The U.S. Department of Energy estimates that EV batteries will last 12 to 15 years in normal conditions. That's about as long as the average gasoline car on the road today (12.2 years old). And most EV batteries are under warranty for at least eight years or 100,000 miles, so automakers are on the hook for trouble that strikes before then.

Experts are optimistic that prices will come down significantly in the coming years, both due to the economies of scale and increased supplies of used batteries. But if you're looking for a car to last you 20 years into retirement, a costly battery replacement is a risk factor to consider.

Another critical piece of the cost puzzle involves another unknown: federal tax incentives. Last summer, a longtime $7,500 federal tax credit for plug-in cars became entangled in Congress' haggling over the omnibus climate-change bill.

As a result, with minimal review of the implications and no time for carmakers or the public to react, the new law eliminated tax credits for all cars manufactured outside of the U.S. It also removed the credits for the most expensive EVs (passenger cars priced above $55,000, along with SUVs and trucks priced above $80,000) and for higher-income customers (individuals with an adjusted gross income above $150,000 or $300,000 for a household).

What's more, any day, the government could restrict the credit further. Starting this month, the law was supposed to limit the full $7,500 to plug-in cars with American-sourced battery components. The trouble is, no one knows which cars have batteries with American-sourced components... if there are any at all. The rule is on hold until the Internal Revenue Service ("IRS") can establish specific rules and determine which cars meet them.

One piece of the law will help budget-minded buyers, though... The tax credits now apply to used plug-in cars for the first time. Individuals earning less than $75,000, or households making less than $150,000, can claim a tax credit representing 30% of the car's sale price (up to $4,000).

Not all used plug-in cars qualify for this tax credit... They must be at least two years old, cost $25,000 or less, and be sold by a licensed car dealer, among other rules. But if you do meet all the criteria – and, as always, if a plug-in car could work for your life – it's another way you could save money.

Attentive readers may have noticed I've been saying "plug-in cars" rather than "electric cars" while talking about tax credits. That's because there's another type of plug-in car that might be the perfect middle ground for you – and it also qualifies for the same federal tax incentives.

It's called a plug-in hybrid, often known by the abbreviation PHEV (for plug-in hybrid electric vehicle). With a PHEV, you still charge up a battery by plugging in your car. But it also has a gasoline engine under the hood, so you don't have to worry about running out of charge.

Consider the Ford Escape PHEV, a small SUV... I tested this one last spring.

Based on EPA testing, the Escape PHEV can travel up to about 37 miles on an electric charge, then average 40 mpg using its gasoline engine until you're able to plug it in again. Given Americans' average round-trip commute of 41 miles, lots of folks can run an Escape PHEV on lower-cost electricity for most (or even all) of their everyday driving. But they can easily take it on a road trip without needing to find a charging station.

The Escape PHEV has a starting price of $40,500. But if you qualify for the $7,500 tax credit, the total would come to slightly less than the price of a non-plug-in Ford Escape Hybrid, which starts at $33,340 and can't be charged to give you all-electric range.

PHEVs aren't perfect. If you don't have a place to charge up regularly, you're burning gas to lug around a big, heavy battery. Also, some PHEVs run the gasoline more than others, like when you accelerate harder or need to run the heater. And you have the oil-change expenses of a gasoline-powered car.

But especially with a tax credit, a new or used PHEV might be a great way to save money without taking the all-electric plunge.

Have you ever driven an EV or a PHEV? Did we leave you wondering about them? Let us know: [email protected].

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Here's to our health, wealth, and a great retirement,

Brady Holt with Dr. David Eifrig
March 30, 2023