Much of the policy discussion around President Trump’s One Big Beautiful Bill has focused on electricity subsidies, where the outcome admittedly falls short of what fiscal conservatives hoped for. Wind and solar projects can still claim subsidies through July 2030, extending billions in taxpayer support for the next five years and driving up ratepayer bills for many years after that.
But what has received far less attention is a significant achievement of this Congress: eliminating the three major policy levers that have artificially supported the electric vehicle market for over a decade. Not phasing them out by 2030 but eliminating them immediately in 2025. These three policy levers accounted for up to $60,000 in subsidies per EV in 2023. Now, for the first time since the 1990s, electric and gasoline vehicles will compete on a mostly level playing field.
The Tax Credit Gets the Headlines
The most discussed change is the elimination of the $7,500 federal tax credit for new electric vehicles and the $4,000 credit for used EVs, both ending September 30, 2025. No doubt this credit has been massively wasteful. Stanford economists found that 75% of EV subsidies claimed under the Inflation Reduction Act went to consumers who would have bought an electric vehicle anyway, meaning the government was spending $32,000 to get each additional EV into the market.
The removal of the credits will also have a large impact on consumer perception of the affordability of EVs. Automotive expert Lauren Fix predicts that without the tax credit, EVs will drop from about 8% of total car sales to “about 2% of sales.” That prediction is probably overstating the impact of the tax credits, but much bigger changes are also in store that will likely drive that huge drop in EV sales.
The Real Game-Changer: CAFE Penalties Disappear
Far more significant than the tax credit elimination is Congress’s decision to eliminate penalties for failing to comply with Corporate Average Fuel Economy (CAFE) standards. The OBBB lowers the penalty amount from $17 to $0, effectively rendering the standards moot. The penalty, along with an illegal multiplier that gives EVs nearly 7 times as many credits as their fuel economy dictates, meant that EVs could sell up to $46,000 in credits per vehicle.
This represents the largest subsidy removal in automotive history. The CAFE standards forced automakers to subsidize EV production to offset gas-powered vehicles that fell below the standards. Every Chevrolet Volt sold allowed GM to sell multiple large SUVs without penalty. This cross-subsidization meant that profitable gas vehicle sales were effectively funding money-losing EV production, a hidden transfer worth tens of billions annually. Now, those EVs will have to be priced according to how much they actually cost to produce, instead of some of the cost being transferred to gas vehicles.
California’s Regulatory Reach Ends
Congress made another major move in May by revoking three key waivers that allowed California and 16 other states, representing roughly 40% of the U.S. auto market, to sidestep the Clean Air Act and set their own emissions standards. Most important among the regulations that were overturned was California’s Advanced Clean Cars II regulation, which required all new passenger cars, trucks and SUVs sold in the state to be zero-emission vehicles by 2035.
This eliminates what amounted to a de facto national EV mandate. California’s market size forces automakers to design their entire fleet strategy around the state’s requirements. Like with the federal fuel economy standards, automakers have to raise prices on gas vehicles in order to pay to meet the state EV mandates, creating a massive wealth transfer that is entirely hidden from auto consumers. Now, Americans will be free to buy gasoline vehicles at their true market value instead of being forced to pay more to subsidize EV production.
The Beautiful Reality of Market Competition
These changes don’t spell doom for electric vehicles but rather an opportunity for genuine innovation. Without artificial support masking market realities, EV manufacturers will need to solve real problems: reducing battery costs, improving charging infrastructure, and addressing environmental concerns about lithium mining (including the massive amounts of water required for it) and battery recycling.
These policy changes represent the most significant shift in transportation policy since the original CAFE standards were enacted in 1975. For nearly three decades, government policies have distorted automotive markets to promote EVs, rather than letting consumers and genuine innovation drive progress.
The Trump administration still needs to reform the underlying CAFE standards themselves and eliminate the EPA’s tailpipe greenhouse gas regulations. But the elimination of penalties and mandates means that for the first time since the 1990s, electric and gasoline vehicles will compete primarily on their actual merits: cost, performance, convenience, and genuine environmental impact.
This may not be ideal news for Tesla’s stock price, but it’s excellent news for American car buyers who will finally have genuine choice, and for taxpayers who will no longer subsidize the vehicle preferences of wealthy early adopters.
