Final EV Tax Credit Rules Impact on U.S. Market

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electric vehicle

Two years after the launch of the Inflation Reduction Act (IRA), the U.S. government has finalized its final electric vehicle (EV) Tax Credit Rules, which could change the face of the U.S. EV market for years to come. While the Biden Administration is adamant that the new rules support a “made in America” approach to manufacturing and critical minerals production, some Democrats and Republicans oppose the rules, suggesting they are far too reliant on Chinese supply chains. 

The IRA provides a maximum tax credit of $7,500 per new EV, with $3,750 offered if the vehicle meets certain critical mineral criteria and another $3,750 provided if the EV meets specific battery component requirements. To be eligible for the tax credit, the vehicle must also meet a manufacturer’s suggested retail price (MSRP) limitation, and the taxpayer claiming the credit must meet certain requirements, such as income limitations. These rules will come into effect on July 5, 2024, and will cover 22 EV models of 100 currently available. 

The new rules have changed little since the draft rules were established last year. They outline regulations on what percentage of foreign battery components and critical minerals are permitted in eligible vehicles, how dealers can offer the incentive at the point of sale, and which foreign suppliers are banned from accessing the credit

The Treasury Says “Made in America”

The U.S. Department of the Treasury and Internal Revenue Service (IRS), which released the rules, says that the final rules lower costs for consumers, spur a boom in U.S. manufacturing, and strengthen energy security by building resilient supply chains with allies and partners. The Treasury believes the rules strengthen and secure supply chains and provide certainty for manufacturers and taxpayers. The organization emphasized that since Biden took office, the U.S. has attracted $173 billion in private-sector investment in EVs and the battery supply chain. 

Secretary of the Treasury Janet L. Yellen stated, “President Biden’s Inflation Reduction Act has unleashed an investment and manufacturing boom in the United States. I’ve seen firsthand in Tennessee, North Carolina, and Kentucky how ecosystems have developed in communities nationwide to onshore the entire clean vehicle supply chain so the United States can lead in the field of green energy.” Yellen added, “The Inflation Reduction Act’s clean vehicle credits save consumers up to $7,500 on a new vehicle, and hundreds of dollars per year on gas, while creating good-paying jobs and strengthening our energy security.”

Meanwhile, Assistant to the President and National Climate Advisor Ali Zaidi said, “EV sales have quadrupled. New factories are opening up, including 15 gigafactories commissioned to bring back jobs manufacturing batteries invented here in America. Driven by the President’s vision and leadership, the sector is experiencing a manufacturing boom – and it’s reaching every corner of the country. These credits for clean vehicles are the latest action by the Biden-Harris Administration to save consumers thousands of dollars and ensure the future of the auto industry is made in America by American workers.”

Do the New Rules Say “Made in China”?

Despite the enthusiasm over the rules within the Treasury, some politicians are not so optimistic about what the new rules mean for the U.S. EV industry. Senator Joe Manchin (D-WV), who wrote much of the IRA, believes there are clear loopholes in the commercial vehicle credit and their EPA tailpipe rules that mean “the Administration is effectively endorsing ‘Made in China.’”

Manchin stated, “The Administration has made clear from Day 1 of implementing the consumer electric vehicle tax credit in the Inflation Reduction Act that they will break the law in pursuit of their goal to flood the market with electric vehicles as quickly as possible. For example, the law sets clear thresholds for sourcing the critical minerals and components necessary for EV batteries domestically and from our free trade partners, which the Treasury has cut in half until 2027. It also prohibits vehicles containing materials sourced from foreign adversaries, including China, Russia, Iran, or North Korea, from being eligible for the tax credit after 2024, but now the Treasury has provided a long-term pathway for these countries to remain in our supply chains. It’s outrageous and illegal.”

Manchin added that the “Administration is so desperate for Chinese EV components that they are blatantly breaking the law by implementing a bill that they did not pass and ignoring what Congress agreed upon.” 

In the lead-up to the passing of the new rules, Senator Manchin took several steps to encourage changes to the rules, close the loopholes, and boost the position of the U.S. automaking and battery manufacturing industries. In December, Manchin sent a letter to the U.S. Government Accountability Office (GAO) requesting a legal opinion on whether the proposed guidance issued by the U.S. Department of the Treasury for implementing section 30D — the Clean Vehicle Tax Credit — of the Inflation Reduction Act, is subject to review under the Congressional Review Act. In January, he held a hearing where he discussed his concerns with the Administration breaking the law by issuing proposed rules not in line with the electric vehicle tax credit provisions in the IRA.

Several Republican politicians have also been vocal about their opposition to the new rules, introducing a bill in the Senate in early May that could eliminate it entirely.

A Necessary Evil?

It does seem that the new rules allow for greater flexibility initially, aimed at driving down the cost of EVs for consumers to encourage greater uptake. However, the Treasury, as well as several automakers and energy industry experts, believe it is necessary to extend tax credits to cars using foreign components in the short term until the U.S. can adequately develop its manufacturing and critical minerals industries. 

Under the rules, automakers are given a two-year grace period to source graphite from non-Chinese entities of concern, so long as they submit a report showing how they will change their supply chains after 2026. The rules also offer credits for cars using critical minerals from 20 free trade partners, as well as countries that have signed a narrower critical minerals free trade agreement, such as Japan. 

While the rules introduce stricter tests for measuring whether 50% of the vehicle’s critical minerals are provided by U.S. producers or a free trade agreement partner, vehicles are also eligible if half the value added by either the extraction or processing of its critical minerals took place in the U.S. or a trade partner. However, some believe this rule is too broad. 

Even with looser rules, only around 20% of EV models currently on the market are eligible for tax credits. The government believes that stricter rules would have a severely detrimental effect on EV uptake and a knock-on effect on the green transition. Several automakers have praised the new rules for providing greater eligibility than would otherwise be possible, giving them time to establish diverse supply chains and domestic manufacturing operations. 

John Bozzella, CEO of the Alliance for Automotive Innovation, explained the updated rules make “good sense for investment, job creation, and consumer EV adoption.” Bozzella added, “The EV transition requires nothing short of a complete transformation of the U.S. industrial base,” he said in a statement. “That’s a monumental task that won’t – and can’t – happen overnight.”

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Felicity Bradstock is a freelance writer specializing in Energy and Industry. She has a Master’s in International Development from the University of Birmingham, UK, and is now based in Mexico City.

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