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A tax credit of up to $7,500 for the purchase of an electric car is about to get a big change — again.
The Inflation Reduction Act, a major climate bill passed last summer, dramatically overhauled an existing tax credit for electric vehicle purchases. The credits are designed to make electric vehicles cheaper and therefore more attractive as part of the administration’s plan to fight climate change.
But the complex rules are also designed to boost U.S.-based manufacturing, build a domestic supply chain for clean vehicles and reduce dependence on China.
In the short term, these goals are in tension. After all, if the only goal was to increase sales of electric cars, it would be easier to do without any restrictions on production.
Those tensions are coming to the fore again as the White House prepares to belatedly implement a key IRA rule: a requirement that a certain percentage of minerals and battery components be sourced from North America or a US trading partner.
The Treasury Department outlined on Friday how it plans to walk that tightrope and implement those sourcing requirements — essentially issuing technical guidance on how automakers can determine whether their cars meet the requirements.
Then, on April 18, the Internal Revenue Service will release an updated list of vehicles still eligible for the tax credit based on the new guidelines.
And the saga isn’t over: The Treasury has yet to clarify how it will implement the other requirements that come into force from 2024.
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Yes, the rules are complicated
The battery supply requirements were essentially put on hold while the IRS tried to figure out the details of their implementation. Even without them, the confusing nature of EV tax credits has frustrated both car buyers and automakers for months.
There are other restrictions that were added in last year’s climate law and are already in place. Only SUVs under $80,000 and cars under $55,000 qualify, and they must be manufactured in North America. There is also an income cap for buyers ($150,000 adjusted gross income for an individual).
These restrictions are not as difficult to meet as the battery source requirements.
That’s because the EV battery supply chain has historically been dominated by China, and as companies race to build mines and battery plants in the U.S., it will take years for those efforts to pay off. The minerals and components needed for batteries are simply not yet produced in large quantities in the US
As a result, it is almost certain that many vehicles currently eligible for the full $7,500 will not be able to meet the new supply standards and the credit will be halved or eliminated, effective immediately.
A senior administration official acknowledged that the rules “will reduce the number of electric vehicles currently eligible for the full credits in the short term,” but argued that it would pay for itself by increasing U.S. production over the next decade.
The White House also noted that the federal government is providing other incentives for electric vehicles and local manufacturing, from charging infrastructure to grants, loans and other tax credits.
John Bozella, head of the automaker’s trade group Alliance for Automotive Innovation, says he expects some vehicles to at least qualify for the $3,750 partial tax credit. He also indicated that automakers are relatively happy with the Treasury Department’s approach to these regulations. “Given the limitations of the legislation, the Treasury Department has done its best to create rules that are consistent with the statute and reflect the current market,” he wrote Friday.
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Disputes about terms and definitions
The supply chain-focused requirements were added at the behest of influential Sen. Joe Manchin of West Virginia, a critical vote of Democrats in the deeply divided Senate.
Manchin has publicly expressed frustration with the Biden administration’s implementation of EV tax credits, including the fact that the credits have been available for the past three months without the government enforcing battery supply requirements.
He was also disappointed that the Treasury interpreted the restrictions as only applying to vehicle purchases (lease cars can get an EV tax credit without any income limits, price caps or supply requirements).
The exact definition of the terms has been the subject of heated debate in recent months, with automakers, mining companies, battery makers, the Biden and Manchin administrations taking positions on things like the meaning of “refining” versus “manufacturing,” a significant distinction in those tax credits.
Another major issue centers on a requirement that would essentially prohibit automakers from sourcing Chinese battery components if they want customers to receive a tax credit.
The Treasury Department has not offered any guidance on how it will implement the rule, scheduled to take effect next year.
At least one thing is clear about these rules: they will change again.