If you're thinking of buying an electric car any time soon, you'd better place your order before President Biden signs the Democrats' big climate, tax and health care package into law — which could happen as soon as this weekend.
Why it matters: Democrats initially hoped to dramatically increase EV adoption via the bill, called the Inflation Reduction Act, by expanding the existing consumer tax credits for battery-powered vehicles.
- But strict supply chain requirements added by Sen. Joe Manchin, Democrat of West Virginia, could instead slow the nation’s switch from gas-powered cars — at least in the short term.
Driving the news: To get Manchin to go along with the broader bill, the rest of the Senate Democrats agreed that only cars with batteries containing a certain percentage of materials sourced from North America or U.S. trading partners will qualify for the credits moving forward — even though that doesn't align with manufacturing reality.
- Although the auto industry and battery makers are racing to invest in a domestic supply chain, it will be years before those facilities are up and running. For now, the EV supply chain is mostly dominated by China — but any cars using Chinese-made battery components would be disqualified from tax credits under the new bill.
- The bill tries to take that into account by phasing in the battery and minerals requirements over time, and the industry is getting lots of financial help to set up domestic production.
- But certain provisions — like a new requirement that EVs must be assembled in North America to be eligible for the credits — will take effect immediately after the president signs the bill into law.
- That will automatically slash the list of eligible vehicles from 72 to about 25, according to the Alliance for Automotive Innovation, an auto industry lobbying group. And when additional sourcing requirements go into effect in 2023, none of today's EVs would qualify for the full credit, the group says.
Where it stands: EV buyers are currently eligible to receive a federal tax credit of up to $7,500, but the benefit is capped at 200,000 vehicles per manufacturer.
- Early leaders like Tesla and General Motors have already hit that limit, so their customers are no longer eligible for the credit. Others are seeing the credits phased out.
- The IRS has a full list of currently eligible vehicles.
What's new: The new bill would eliminate the manufacturer cap starting in 2023. But only vehicles under a certain price ($80,000 for trucks and SUVs, or $55,000 for all other vehicles) would qualify.
- Eligible buyers also must make less than $150,000 if single, or $300,000 if married.
- Used EV buyers could get a credit of up to $4,000.
Zoom out: To pass the new bill, Senate Democrats needed to be fully unified — giving Manchin lots of leverage to extract concessions.
- Manchin wanted to tie the EV credit to a domestic manufacturing chain in part to reduce the industry's reliance on China.
What they're saying: "The $7,500 credit might exist on paper, but no vehicles will qualify for this purchase incentive over the next few years," John Bozzella, the Alliance for Automotive Innovation's president and CEO, writes in a blog post.
- "That’s a missed opportunity at a crucial time and a change that will surprise and disappoint customers in the market for a new vehicle," Bozzella writes, adding it will also be a "major setback" to the country's effort to hit 40-50% electric vehicle sales by 2030.
Yes, but: People will buy EVs even without federal tax credits — especially if gas prices stay relatively high — but only if they're available. Inventories are tight, and prices are rising sharply.
- In the long run, building a domestic EV supply chain should make electric cars cheaper — eventually.
What's next: The House of Representatives is expected to approve the bill Friday and quickly send it to Biden's desk. After that, figuring out which vehicles will qualify for what portion of the tax credit over time will take some doing.
- It's up to the U.S. Treasury Department to implement guidelines for measuring battery and mineral content by year-end.
- Then each automaker must figure out how much individual vehicles qualify.
The bottom line: Lots of unknowns remain about this legislation's consumer impact.
