Many electric vehicles lose a large tax deduction with new rules
WASHINGTON (AP) – Fewer new electric vehicles will qualify for a whopping $7,500 federal tax credit later this year, and many will get just half that, under rules proposed Friday by the U.S. Treasury Department.
The rules, which are required under last year’s Inflation Reduction Actis likely to slow consumer acceptance of electric vehicles and could delay President Joe Biden’s ambitious goal that half of new passenger cars sold in the United States run on electricity by 2030.
The new rules take effect on April 1[ads1]8 and aim to reduce the US’s reliance on China and other countries for electric vehicle battery supply chains.
Electric vehicles now cost more than $58,000 on average, according to Kelley Blue Book, a price that is out of reach for many American households. The tax credits are designed to bring prices down and attract more buyers. But $3,750, half the credit, may not be enough to lure them away from less expensive gas-powered vehicles.
Biden administration officials admit that fewer electric vehicles will be eligible for tax credits in the short term because of the rules, which set standards for where EV battery parts and minerals come from. But they say that over time, more electric cars and parts will be produced in the United States, creating a domestic supply chain and more jobs. The credits and other measures would also end America’s reliance on China for parts and minerals, officials say.
The new rules will help consumers save money on electric cars “and hundreds of dollars a year on gas, while creating American manufacturing jobs and strengthening our energy and national security,” Treasury Secretary Janet Yellen said Friday.
But Sen. Joe Manchin, the West Virginia Democrat who negotiated terms of the new law requiring battery purchases in North America, said the guidance released by the Treasury Department “completely ignores the intent of the inflation reduction law.”
Manchin called it “appalling” that the Biden administration “continues to ignore the purpose of the lawwhich is to bring manufacturing back to America and ensure that we have reliable and secure supply chains.
Referring to the proposal’s 60-day comment period, Manchin said: “My comment is simple: Stop this now. Just follow the law.”
Drivers looking to buy an electric car need to move fast to get the full $7,500 tax credit. The Internal Revenue Service lists more than three dozen electric or plug-in hybrid passenger vehicles made in North America that are now eligible. But some will not qualify or will get only half when the new Treasury rules come into effect in less than three weeks.
A finance minister would not give an estimate of how many electric cars would be eligible under the new rules. The department plans to publish a list on April 18, the official said.
Car manufacturers must certify that their vehicles meet the requirements for full or partial tax credits.
John Bozzella, executive director of the Alliance for Automotive Innovation, an industry trade group, said only a few of the 91 EV models now on sale in the U.S. are likely to get the full credit, although some will qualify for half.
“We now know the playing field for EV tax credits for the next year or so. March 2023 was as good as it gets,” Bozzella said.
The big problem is new rules that limit the percentage of battery parts and minerals that come from countries that do not have free trade or mineral agreements with the United States.
This year, at least 40% of the value of battery minerals must be mined, processed or recycled in the US or countries with which it has trade agreements. It rises 10% each year until it reaches 80% after 2026.
Also, at least 50% of the value of battery parts must be manufactured or assembled in North America this year. This requirement rises to 60% next year and in 2025 and jumps 10% each year until it reaches 100% after 2028.
Some automakers can meet the requirements for sourcing battery parts, but few will be able to comply with the mineral regulations, said Guidehouse Research e-Mobility analyst Sam Abuelsamid. Much of the lithium used in EV batteries now comes from China.
“The mineral demand is going to be the really challenging one,” Abuelsamid said. “Setting up refining for lithium elsewhere is likely to take the longest.”
General Motors said Friday that at least three of its electric vehicles will qualify for the full credit. The Cadillac Lyriq, which is on sale now, will be eligible from April 18, while the Chevrolet Blazer and Equinox will be eligible when they hit showrooms later in the year. GM is working to get the full $7,500 for other electric cars and intends to keep it as battery content requirements get tougher, a spokesman said. The company said it has been working with a domestic supply chain and is building batteries in the United States
The Inflation Reduction Act also sets price limits for new electric vehicles: $55,000 for cars and $80,000 for pickups, vans and SUVs. There are also income limits aimed at stopping wealthier people from getting credit. Buyers cannot have an adjusted gross annual income over $150,000 if single, $300,000 if filing jointly and $225,000 if head of household.
In addition, starting in 2025, battery minerals cannot come from a “foreign entity of concern”, mainly China and Russia. Battery parts cannot be purchased in these countries as of 2024; minerals cannot come from these countries in 2025.
The Biden administration said rules governing that requirement are in the works.
The new rules define principles that countries must meet in order to be eligible. Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, Singapore and Japan are on the list. Japan reached an agreement this week with the US on trade in critical minerals for EV batteries.
Although the proposed rules take effect on April 18, the Biden administration is taking public comments, and the rules could be changed later, including the addition of countries negotiating trade deals with the U.S.
The government says companies have announced at least $45 billion in U.S. investments since the Inflation Reduction Act was passed.
Senate Finance Committee Chairman Ron Wyden, D-Oregon, said he has concerns about the battery materials. “Free trade agreements cannot be decided unilaterally by the executive branch,” he said at a recent hearing. “They require congressional consultation and consent. That includes all critical minerals agreements.”
Krisher reported from Detroit.