Pondering an Electric Vehicle? Discover the Latest Tax Credit Updates

As the Biden administration’s proposed regulation determining which vehicles are eligible for the updated EV tax credit takes effect on April 18, the range of qualifying vehicles will actually decrease.

President Joe Biden and automotive companies strive to significantly boost the number of electric vehicles on the streets and they face a dilemma. The federal tax credit, which allows American consumers to save up to $7,500 on an EV, comes with intricate prerequisites – including the stipulation that their batteries and components originate from the US or nations that have a free-trade agreement with it.

The Inflation Reduction Act, championed by Democratic Senator Joe Manchin of West Virginia, introduced these new tax credits. The aim was to shift the EV supply chain away from China, which has long held a dominant position in the sector.

However, achieving this objective could take years, and in the interim, it will significantly decrease the assortment of zero-emission vehicles that American taxpayers can purchase under the program.

Senior officials in the Biden administration have openly acknowledged that the new regulations will make it more challenging for consumers to capitalize on the updated tax credits in the “short-term.”

“The stringent regulations on critical minerals and battery components will decrease the number of electric vehicles presently qualifying for the full credit in the short term, with the goal of incentivizing supply chains and manufacturing to relocate to the US,” a senior US Treasury Department official informed journalists. “However, we anticipate that these criteria will substantially boost the production and sales of vehicles in the US over the next ten years.”

Essentially, it might take automakers several years to establish the American-centric supply chain necessary to fulfill Manchin’s vision, although they have welcomed this concept.

Manufacturers have acknowledged the bill’s benefits for the US automotive industry, and it is already inspiring them to expand their domestic operations and employ thousands of new workers.

Thomas Boylan, a former Environmental Protection Agency official and the regulatory director for the EV trade group Zero Emission Transportation Association, stated that the timeline is “truly the million-dollar question.”

Boylan further emphasized the importance of time, as electric vehicles are gaining significant traction but remain unaffordable for many buyers. He added that consumers interested in purchasing an EV and relying on tax credits for financial aid might be unwilling to wait years to acquire their desired vehicle.

The new tax credit and its accompanying guidelines are intricate, with more information expected to emerge in the coming weeks and months. Here’s what you should be aware of:

How many EVs are presently eligible for federal tax credits? At present, 21 vehicles qualify for federal tax credits up to $7,500. This number will change on April 18 when the Treasury’s updated guidance comes into effect.

How many EVs will be eligible for the new tax credit starting April 18? The exact number remains unknown. Senior administration officials have not provided an estimate, as automakers still need to ascertain which of their vehicles might qualify under the revised regulations. However, the number is expected to be considerably lower than 21.

Auto manufacturers will also identify eligible EVs. Ford Motor Company President and CEO Jim Farley stated that they would “assist customers in determining their eligibility for incentives” and promised to share more information “soon.”

What does this mean for American consumers? Starting April 18, the most evident impact on consumers will be the reduced number of vehicles eligible for credits. Some currently qualifying cars will be excluded under the new regulation. As automakers strive to relocate their factories and supply chains to the US and other countries with free trade agreements, more vehicles will be added to the list, but this process could take months or even years.

Under the updated regulation, consumers can receive up to $7,500 in tax credits on eligible vehicles. There is no limit on the number of EVs manufacturers can sell with tax credits, provided those vehicles meet the criteria. This differs from the previous rule, which set a cap on the number of vehicles eligible for tax incentives.

What does the new EV tax credit regulation entail, and why is it complex?

The latest Treasury regulation on EVs originates from the Inflation Reduction Act, a climate and clean energy legislation passed by Congress last year. Senator Manchin, who contributed significantly to the IRA, modified the federal EV tax credits to shift the supply chain for critical minerals—essential for items like EV batteries, solar panels, and smaller rechargeable batteries—away from China.

Two key prerequisites must be met by automakers for their EVs to qualify for the $7,500 tax credit: a critical mineral requirement and a battery component requirement, each worth $3,750.

The critical mineral requirement stipulates that a specific percentage of the value of critical minerals powering EV batteries (such as lithium, nickel, graphite, and copper) must be extracted, processed, or recycled in the US or a country with a free-trade agreement. The battery component requirement mandates that a certain percentage of the battery component’s value must be manufactured or assembled in North America.

Notably, these requirements will gradually increase over several years. For critical minerals, the percentage begins at 40% in 2023 and rises annually to 80% by 2027. For battery components, the percentage starts at 50% and escalates each year to 90% by 2028.

Officials and experts agree that implementing these rules in a brief period is incredibly complicated.  White House senior adviser John Podesta told CNN, “They’re just quite complex.”

Under the new rule, the US will have free trade agreements on critical minerals with 21 countries: 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.

Chile and Australia are particularly noteworthy, as both possess abundant lithium supplies and extensive mining operations. Senior administration officials noted that the new rule would make lithium from these countries more competitive, potentially redirecting it to Japan or Korea, or even straight to the US, instead of China. Korea, Mexico, and Japan have significant car assembly operations, and many of their vehicles are sold in the US.

President Biden has stated that the US is also negotiating to add the European Union to the list, with the possibility of including more countries in the future.

What other updates can we expect in the guidance?

Administration officials are developing further guidance to prohibit auto companies from using minerals sourced from foreign entities of concern, like China, in their electric vehicles eligible for the tax credit.

This proposal has yet to be introduced and will eventually apply to battery components starting in 2024 and critical minerals beginning in 2025.

How long might it take to establish a critical mineral supply chain in eligible countries? Recent months have witnessed numerous announcements from car companies relocating their EV and battery production facilities to the US and neighboring countries.

However, experts and officials agree that the initial phase of the critical mineral supply chain—mining and refining critical minerals—will be the most challenging aspect to modify, primarily because China maintains a strong hold on it. The US has only a few lithium mines, located in Nevada. Several companies are competing to initiate lithium mining around California’s Salton Sea, but no commercial operations have started yet.

Boylan explained that the Department of Energy “can give a loan to build a battery manufacturing facility,” but “it’s a whole different ballgame from talking about permitting an open-pit lithium mine.”