Inflation Reduction Act renews $7,500 EV tax credit

Jun 30, 2023

LOS ANGELES — Americans in the market for a new electric vehicle will be affected by changes to the federal EV tax credit the U.S. Senate approved Sunday in the Inflation Reduction Act.

Under the new bill, the $7,500 tax credit many new EV buyers have enjoyed for the past decade will continue through the end of 2032.

Effective next year, the EV tax credit will be available to buyers immediately upon purchase. Previously, customers had to wait until they filed their tax returns. EV buyers who bought or entered into a written contract to purchase a new EV after Dec. 31, 2021, and before the bill is enacted, will also qualify.

The $7,500 credit applies to vehicles with a manufacturer's suggested retail price of less than $55,000 for cars and no more than $80,000 for trucks and SUVs. To qualify, single tax filers can earn no more than $150,000 annually. Couples filing jointly are capped at $300,000.

Under the terms of the Inflation Reduction Act, the credit will also be available on manufacturers’ makes and models that exceed 200,000 sales. Under the current program, manufacturers that had sold that many EVs were no longer eligible. Both Tesla and General Motors have already reached that limit. Toyota and Nissan are both close to it.

For manufacturers’ vehicles to qualify, they must also be assembled in North America. If passed by the House as expected later this week, and signed by President Joe Biden, the new rules would take effect Jan. 1, 2023.

The new federal EV tax credit system "has its ups and downs," said Katherine Stainken, vice president of policy for the Electrification Coalition, a nonprofit, bipartisan EV advocacy group.

On the upside, Stainken's group applauds the Inflation Reduction Act for extending the federal tax credit program and making it available to all EV makers, regardless of how many vehicles they have already sold. It also supported the vehicle price and buyer income caps, though it would have liked eligible buyers with higher income levels to be included.

The bill's sourcing requirements for batteries and the minerals that are used to make them, however, could prove problematic for EV makers.

Starting next year, the Inflation Reduction Act requires that 40% of the minerals and 50% of the battery components used to make EVs come from North America or a country with which the U.S. has a free trade agreement. As of December 2023, no battery components can come from a foreign entity of concern, such as China. The same requirement applies to minerals at the end of December 2024.

Right now, 90% of the minerals used in EVs are processed in China, Stainken said. China is not one of the countries with which the U.S. conducts free trade. Instead, the U.S. would need to source EV component materials from inside the U.S. or with trading partners such as Australia, Canada, Chile and Korea.

"All countries have critical minerals," Stainken said. "It's a matter of whether it's economically viable to source and extract them."

In 2019, the Trump administration devised a strategy for the U.S. Department of Interior to locate domestic supplies of critical minerals in an effort to reduce foreign reliance on the key ingredients for items like cellphones, computers and cars. Last year, the Biden administration bolstered that effort when it provided $75 million in funding for the U.S. Geological Survey to map critical minerals through the Bipartisan Infrastructure Law.

But it is unclear whether enough cobalt, lithium or many of the other minerals needed for EV production can be reliably sourced from inside the U.S. or its friendly trade partners as quickly as the Inflation Reduction Act dictates, especially with automakers poised to radically ramp up EV production.

General Motors, which sells more than 2 million cars every year in the U.S., has said it will phase out gas-powered cars by 2035. Ford, which sold 1.7 million vehicles in the U.S. last year, has pledged to end sales of gas- and diesel-powered cars by 2040. Many other global automakers who build cars in the U.S. have committed to similar timelines for a transition to zero emissions.

"The EV tax credit requirements will make most vehicles immediately ineligible for the incentive," Alliance for Automotive Innovation Chief Executive John Bozzella said in a statement released Sunday, just after the Senate approved the Inflation Reduction Act. "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. It will also jeopardize our collective target of 40-50% electric vehicle sales by 2030."

Between battery-electric, plug-in hybrid and fuel cell electric vehicles, 72 different EV models are currently available for sale in the U.S. The Alliance estimates that in 2023, 70% of those vehicles would no longer be eligible for the tax credit because of the material, component and assembly requirements, and that none of them will qualify once the sourcing rules become more stringent.

The American Trade Association and industry lobbying group for the world's largest automakers said that "for a transformation like this to succeed, many supportive policies beyond the auto industry's control must be in place."

The alliance is advocating for a more gradual phase-in of the battery, mineral and U.S. assembly requirements for EVs to qualify for the federal tax credit. Specifically, there must be new supply chains that incorporate national security allies, Bozzella said, along with usable manufacturing and consumer tax incentives, expedited permitting for critical mineral mining, and related processing and ubiquitous charging infrastructure across the country.