The Trump Admin. got its sweeping budget bill through both houses of Congress, and the impact on the auto industry will be felt for years to come.
While measures in the One Big Beautiful Bill like Medicaid cuts won’t kick in until 2027, the $7,500 federal electric-vehicle tax incentive will expire on Sept. 30 – ditching new and used battery-electric and hybrid-vehicle credits – possibly making BEVs more expensive for consumers and slowing EV adoption.
Critics of the White House’s war on clean energy investments argue this not only will result in stranding EV investments made by automakers, but it also undermines the auto industry’s competitiveness compared with China and Europe.
“By dismantling these critical incentives, the Senate has taken a sledgehammer to the U.S. EV industry at a time when global competition – particularly from China – is intensifying. … Their removal threatens to stall this momentum and cede leadership in transportation electrification to foreign adversaries,” says Ben Prochazka, executive director-Electrification Coalition.
While the budget bill taketh away, it also giveth something back to the auto industry, including dealers, by way of a new car-loan interest deduction. The bill allows new-car buyers to write off auto loan interest on U.S.-assembled vehicles (MY 2025–2028). The deduction will be limited to $10,000 per year and eliminated for individuals earning more than $100,000 or couples making over $200,000. The deduction will apply to cars purchased after Dec. 31, 2024. Car buyers won’t have to itemize to claim the deduction.
The bill also extends the Trump Admin.’s 25% tariffs on autos and auto parts – targeting imports from Canada, Mexico and China – after temporary United States-Mexico-Canada Agreement (USMCA)-linked exemptions expire. Andersen Consulting estimates these codified tariffs could raise costs of new vehicles by $3,000–$6,000 on average, or up to $10,000–$15,000 for some luxury models. Whatever costs are not passed on to consumers will be absorbed against automakers’ earnings. Analysts at Third Bridge and Cox Automotive foresee average new-car price hikes of $5,000 to $6,000 –leading to a 16% jump in retail prices as a result of tariffs.
President Donald Trump has been pushing Federal Reserve Chairman Jerome Powell for a cut in interest rates, which would benefit auto sales as well as home buying, but the Trump appointee says the tariffs have stood in the way. Powell agreed with the statement the Fed would have cut interest rates by now if it weren’t for Trump’s tariffs during a July 1 panel at a banking forum in Portugal..
TD Economics estimates U.S. auto sales could drop 10%-20% the rest of this year and into 2026, with ripple effects on the neighboring economies of Canada and Mexico. J.D Power’s forecast for the second half of 2025 anticipates a slowdown in U.S. auto sales, following a stronger first half as many as new-vehicle sales were pulled ahead to avoid tariffs and the cancellation of the EV tax credit.
J.D. Power forecasts that 2025 new-vehicle sales will total approximately 15.3 million units, reflecting a modest increase over 2024 but indicating a shift toward a more cautious market in the latter half of the year.
EV sales are expected to surge until the end of September. Ingrid Malmgren of Plug In America expects a surge in EV sales. “This is going to be the summer of the EV, because come the end of September those credits will be gone,” the organization’s senior policy director says in a statement.
A coalition of industry groups, including the Alliance for Automotive Innovation and the Motor & Equipment Manufacturers Assn., warn that the Trump Admin.’s sweeping tariffs could trigger production halts if even a single supplier fails – impacting 10 million U.S. auto-related jobs and $1.2 trillion in economic output.
Trade Stalemates
The Trump Admin. has not been able to cut new trade deals with countries it is tariffing; President Trump said last week the White House is now just sending letters to trade representatives informing them of tariffs. Japan, Germany and South Korea, three major auto exporters to the U.S., have said the default 25% tariffs on their countries are not tenable. South Korea and Japan have no tariffs on foreign-made automobiles and parts. Germany has a 10% tariff on imported passenger cars but has indicated it would cancel it. President Trump, however, also wants Germany and the European Union to import more liquified natural gas and arms from U.S. defense companies; it’s unclear what he wants from Japan and South Korea.
In a statement following Senate passage of the broader reconciliation bill, the Alliance for Automotive Innovation voiced support for several measures the bill, especially the Advanced Manufacturing Production Credit, which modifies the existing clean-energy–focused credit established under the Inflation Reduction Act (IRA) by contouring the credits through 2029 then phasing them down after that.
Alliance CEO John Bozzella praises the measure for working to bring battery manufacturing back to the U.S. and excluding Chinese companies, preserving “billions in auto-related manufacturing investments and jobs.”
The Alliance also says, though, that phase-out of the EV tax credits will be extremely challenging to EV adoption and hurt consumer affordability.
Removing EV credits and rolling back fuel-efficiency standards derail automakers’ investments in battery and hybrid factories, a professor contends. “Gutting the incentives of the IRA will likely mean a number of projects are abandoned… While the rest of the world moves on to clean energy and looks to China for inputs, the U.S. will be left behind,” says Joshua Busby, public affairs professor and an energy policy expert at the University of Texas at Austin.
Long-term Economic Repercussions
Economists fear a recession if consumer spending declines due to the combination of tariff-induced inflation and reduced auto affordability.
“The boost to the national debt from President Trump’s sweeping tax bill could add fresh fuel to inflation just as his tariff policies are already pushing prices up… detractors fear it will drive up interest rates and borrowing costs, potentially leading the economy toward stagflation or recession,” says former Treasury Secretary Lawrence H. Summers.
Meanwhile, on Sunday, President Trump vowed new 10% tariffs on countries that seek alignment with the “Anti-American policies of BRICS,” referring to Brazil, Russia, India, China and South Africa, presently meeting at a summit in Brazil. The group had, prior to his comment, issued a joint statement Sunday criticizing rising tariffs as “unjustified unilateral protectionist measures.”
China is the world’s leading new-vehicle market, with 31 million new vehicles sold last year. China also is dominant in EVs, with about 40% of the 31 million 2024 sales comprising BEVs, hybrids, plug-in hybrids and fuel-cell models. A strong export business has led to increasing numbers of Chinese vehicles being sold in Brazil, India and Russia, impacting legacy automakers’ market share in those countries.
