WASHINGTON — It will soon become harder to get a full $7,500 tax credit for a new electric vehicle under proposed rules released Friday by the U.S. Treasury Department — and interested buyers should move fast.
New battery component and mineral requirements will go into effect on April 18, the day after the new rules are officially published in the federal register, slashing the list of around two dozen vehicles that have qualified without the requirements for the last three months, at least in the short term.
This period "may go down as the highwater mark for EV tax credit eligibility since the IRA passed last year," said John Bozzella, CEO of the Alliance for Automotive Innovation. "We now know the EV tax credit playing field for the next year or so. March 2023 was as good as it gets."
The long-awaited rules are the first major indicator of how the Biden administration will implement the marquee tax credit for electric vehicles passed through the Inflation Reduction Act — and while the law's requirements, written by centrist Democrat Sen. Joe Manchin, are rankling automakers, the administration has shown some early leniency to the industry.
The IRA "is lowering costs for American consumers, building a strong U.S. industrial base, and bolstering supply chains,” Treasury Secretary Janet Yellen said in a statement. These rules “will help consumers save up to $7,500 on a new clean vehicle and hundreds of dollars per year on gas, while creating American manufacturing jobs and strengthening our energy and national security."
In order to qualify for $3,250 of the $7,500 EV tax credits formed under the Inflation Reduction Act, a vehicle must have half of its battery components made in North America. To get the other $3,250, at least 40% of the value of the minerals in the battery must be extracted or processed in the United States, or come from a country the United States shares a free trade agreement with. Those thresholds rise annually for the next several years.
The vehicle must be built in North America and stay under $80,000 for a van, pickup truck or SUV or under $55,000 for a sedan. A final complicating factor comes into play in 2024: A vehicle is disqualified if any of its battery components come from a so-called "foreign entity of concern" like China or Russia. In 2025, that extends to any of its critical minerals.
The Treasury did not address this element of the law in its Friday rule, indicating they will issue separate guidance on it later in the year. How it's implemented will be a crucial question for car companies hoping to shape their supply chains to comply. For example, how will the government treat a mineral processed in China, but sent to an allied country like Japan to be put into a battery component before shipping to the United States?
The stringent requirements have been a major stressor for automakers hoping to capitalize on the federal subsidy and accelerate EV sales, and they have been the focus of vigorous lobbying since the law was passed. It has also been a point of tension between the Biden administration and lawmakers on Capitol Hill as they seek to both wean automakers off Chinese supply chains and build a greener economy.
Automaker add-ons
The Treasury Department was supposed to release rules implementing the critical mineral and battery component requirements by the end of last year, but pushed it until the end of March in order to sift through the complicated text.
They released a white paper in December indicating where those rules might be headed. Friday's rules are not a big departure from that forecast and include some provisions that will help automakers.
One tweak: The agency created the term "constituent materials," dubbing the metal powders, foils, binders, salts and additives that go into a cathode (the most expensive party of a battery) and anode "critical minerals" rather than "battery components."
This wonky change expands where automakers can get it and still qualify — from any country the United States has a free trade agreement with, not just North America. This has prompted major concern from domestic battery recycling companies like Redwood Materials and labor groups like the United Steelworkers, who argue it could push investments (and jobs) out of the United States and into allied countries.
"This change would allow many free trade countries outside of North America to continue manufacturing key battery components, overruling congressional intent in onshoring this vital and most valuable economic function," Redwood CEO J.B. Straubel wrote in a letter to the Treasury Department earlier this month and shared with The Detroit News.
The administration has also moved to build critical mineral agreements that would allow key allies to qualify as a free trade partner despite not being one of the 20 countries with which the United States currently shares a formal free trade agreement. The United States inked a deal with Japan earlier this week and has one in the works with the European Union.
This strategy — which has been met with blowback from both sides of the aisle on Capitol Hill — was formalized in the proposed rule issued Friday, and noted it would add any additional countries if new agreements are made.
These come out as wins for automakers, who are seeking the greatest number of possible sources for qualifying the credits. It adds to another early victory, in which they successfully pushed the administration to count most crossover SUVs under the higher $80,000 cost limit.
Major advocacy groups representing automakers reiterated their dedication to an electric vehicle future in statements released Friday while noting the challenges the new rules pose, and urged the administration to secure trade agreement with the European Union.
Autos Drive America CEO Jennifer Safavian said the guidance "continues to highlight the challenges ahead for U.S. automakers’ electrification efforts," and Bozzella of the Alliance for Automotive Innovation said the guidelines seek to clarify "the strictest and most convoluted rules yet." Albert Gore, executive director of the Zero Emission Transportation Association, said it "provides a clear roadmap" for the industry "to work together in the shared mission of expanding access to electric vehicles to all Americans."
The proposed rules will undergo a 60-day public comment period, after which they could be changed. They will be implemented as if they are the final rules in the meantime.
What the new rules mean for car buyers
In the short term, the number of electric vehicles that will qualify for a tax credit will be limited come April 18, when the rules go into effect.
Jessica Caldwell, Edmunds' executive director of insights, put it plainly: "If you’ve been eyeing an EV you know you can buy on the spot or take delivery of before April 18, it’s time to lock in your purchase."
Treasury officials didn't say how many would still qualify once the rules go into effect, but expect the number to increase over the coming years as battery supply chains shift in response to the law. The Internal Revenue Service website and fueleconomy.gov will be updated around the middle of every month to indicate which vehicles are eligible.
However, some automakers have expressed confidence that they'll be able to take advantage of at least a portion of the new credit right away.
"We think, out of the gate, we’re going to be eligible for the $3,750, and we’ll ramp to have full qualification in the next two to three years, getting up to the $7,500," GM CEO Mary Barra said last October. "It just takes a couple of years to ramp up based on our expectations with the supply moves that we’ve already made."
But waiting will change the way consumers experience the credit: Beginning in 2024, car buyers will get a discount on qualifying electric vehicles when they buy them, rather than a tax credit at the end of the year. That will make the credit easier to access and allow people who owe less than $7,500 on their taxes to take advantage of it.
An eye on Manchin
Manchin, the West Virginia Democrat who wrote the new tax credits, has been a vocal critic of the administration's approach to implementing the Inflation Reduction Act. He has argued the administration has been too permissive and will allow more taxpayer funds to go out than he intended.
He released a scathing response to the rules Friday, saying it "completely ignores the intent" of the law and that the administration's approach is "horrific."
"American tax dollars should not be used to support manufacturing jobs overseas. It is a pathetic excuse to spend more taxpayer dollars as quickly as possible and further cedes control to the Chinese Communist Party in the process," he said. "The guidance includes a 60-day comment period, and I ask for every American to comment. My comment is simple: stop this now — just follow the law."
On Thursday, he said he would be willing to go to court if he disagrees with Treasury's guidance. "If it goes off the rails" and violates the intent of the Inflation Reduction Act, he said, "I will do whatever I can. If that means going to court and I can do it, I'd do it."
He said he's most concerned that the rules won't adequately push processing into the U.S.: "It's not (meant to allow) everyone to put all the parts and build everything you can for that battery somewhere else and then send it here for assembly."
Sen. Debbie Stabenow, D-Michigan, originally wrote the EV tax credit legislation to include extra incentives for unionized workforces and without the critical mineral requirements.
The final EV language written by Manchin "was not well thought out," she said in a statement Friday. "Despite this, we need this law to work, and today’s guidance from the Treasury Department is an important step in the right direction."
