In an aerial view, Tesla cars are recharged at a Tesla charging station in Corte Madera, California on February 15, 2023. The Biden administration wants to increase sales of electric cars, but also wants to incentivize production with based in the United States.
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In an aerial view, Tesla cars are recharged at a Tesla charging station in Corte Madera, California on February 15, 2023. The Biden administration wants to increase sales of electric cars, but also wants to incentivize production with based in the United States.
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A tax credit of up to $7,500 for buying an electric car is about to undergo a major change, again.
The Inflation Reduction Act, a major climate law passed last summer, dramatically reformulated an existing tax credit for the purchase of electric vehicles. The credits are meant 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 incentivize production in the United States, to build a clean vehicle supply chain 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 so without any production limitations.
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 come from North America or a American trading partner.
The Treasury Department on Friday outlined how it plans to walk that tightrope and implement those sourcing requirements, essentially issuing technical guidance on how automakers can determine whether their cars qualify.
Then, on April 18, the Internal Revenue Service will release an updated list of which vehicles are still eligible for the tax credit, under the new guidance.
And the saga is not over: the Department of Finance has not yet clarified how it will apply other requirements that will start from 2024.
President Biden speaks at General Motors Factory’s ZERO electric vehicle assembly plant in Detroit on Nov. 17, 2021. The Biden administration wants a certain percentage of minerals and battery components to come from North America or from a US business partner.
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President Biden speaks at General Motors Factory’s ZERO electric vehicle assembly plant in Detroit on Nov. 17, 2021. The Biden administration wants a certain percentage of minerals and battery components to come from North America or from a US business partner.
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Yes, the rules are complicated
The battery provisioning requirements had essentially been put on hold while the IRS tried to figure out the details of their implementation. Even without them, the confusing nature of tax credits for electric vehicles has frustrated both car buyers and automakers for months.
There are other limits that were added to 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 built in North America. There is also an income limit for buyers ($150,000 adjusted gross income, for an individual).
These restrictions are not as difficult to meet as the battery supply requirements.
That’s because the EV battery supply chain has historically been dominated by China, and while companies are racing to build battery mines and plants in the US, those efforts will take years to bear fruit. The minerals and components needed for batteries are not yet manufactured 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 sourcing standards and will see the credit 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 with increased American production over the next decade.
The White House also noted that the federal government is offering other incentives for electric vehicles and domestic manufacturing, from charging infrastructure to grants, loans and other tax credits.
John Bozzella, the head of the automaker’s trade group, the Alliance for Automotive Innovation, says he expects some vehicles to at least qualify for a partial $3,750 tax credit. He also indicated that automakers are relatively satisfied with how the Treasury Department handled these regulations. “Given the limitations of the legislation, Treasury has done everything it can to produce rules that comply with the statute and reflect the current market,” he wrote Friday.
Senator Joe Manchin speaks to reporters at the U.S. Capitol in Washington, DC on March 22, 2023. Manchin was a critical vote in passing President Biden’s massive climate bill , but has expressed frustration with the implementation of electric vehicle components.
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Senator Joe Manchin speaks to reporters at the U.S. Capitol in Washington, DC on March 22, 2023. Manchin was a critical vote in passing President Biden’s massive climate bill , but has expressed frustration with the implementation of electric vehicle components.
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Disputes over terms and definitions
The supply chain-focused requirements were added at the urging of influential Senator Joe Manchin of West Virginia, a critical Democratic vote in a closely divided Senate.
Manchin has publicly expressed his frustration with the Biden administration’s implementation of the electric vehicle tax credits, including the fact that the credits have been available for the past three months without the government enforcing the requirements of battery supply.
Also frustrated was the Treasury Department’s interpretation that the restrictions only apply to vehicle purchases (lease vehicles can get an electric vehicle tax credit without any income limits, price caps, or stocking requirements ).
The exact definition of the terms has been the subject of fierce debate in recent months, with automakers, mining companies, battery makers, the Biden administration and Manchin taking positions on things like the meaning of “processing” versus ” manufacturing”, an important aspect. distinction in these tax credits.
Another major question centers on a requirement that would essentially prohibit automakers from sourcing Chinese battery components if they want customers to get the tax credit.
The Treasury has not offered any guidance on how it will implement this rule, which is expected to take effect next year.
One thing, at least, is clear about these rules: they will change again.
