Here’s Everything You Need To Know About the New Electric Vehicle Tax Credit

The EV tax credit is set to change in a big way, so let’s run through the details.

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Here’s Everything You Need To Know About the New Electric Vehicle Tax Credit © Here’s Everything You Need To Know About the New Electric Vehicle Tax Credit

The United States House of Representatives passed the eagerly awaited Inflation Reduction Act of 2022 last Friday, sending a core piece of climate-based legislative reform to President Joe Biden's desk. While the bill touches on many areas of climate, health, and tax policy changes, it also focuses on revamping the broken electric vehicle tax credit system that the country currently has in place. The details are complex, so let's dive in.

Consumers will finally have a bill that reduces the cost of an eligible vehicle at the time of sale, a huge win for car buyers looking to reduce their monthly payments as vehicle costs skyrocket. But the passage doesn't come without criticism, as many automakers are now scrambling to determine just how to pivot their supply chains to meet the complex sourcing requirements set forth in the bill. Several have vocalized their opposition by claiming that it actually makes more vehicles on the market today ineligible than previously.

First and foremost, gone is the credit cap of 200,000 electrified vehicles per automaker. Instead, the credit will remain active for 10 years and go away at the end of 2032.

Previously, automakers who sold more than 200,000 relevant vehicles had their eligibility for the tax credit phased out. General Motors and Tesla are two notable examples, though other car companies like Ford and Toyota were also on the cusp of losing eligibility due how many new battery-equipped vehicles sold. The act also sets the tax credit to a flat $7,500 for new vehicles rather than being calculated based on overall battery capacity. What's more, it looks to expand the credit beyond just plug-in vehicles so automakers pushing fuel cell EVs can have a slice of the pie.

How the credit gets applied to the vehicle purchase has also changed. Previously, the tax credit could only be applied at tax time, meaning a deduction on the amount of taxes owed to the government, if any, at the end of the year. The new legislation applies the tax credit to the time of sale instead.

Used electric vehicles are also big winners here. They have previously been excluded from any form of the EV tax credit but will now be eligible for partial credit. Used clean vehicles will now be eligible for a credit of up to 40 percent of the purchase price, though this credit won't exceed $4,000; in turn, a $13,300 EV would be peak bang-for-buck territory for the used vehicle credit.

While the changes seem good on paper, there's more than one catch that makes many new and used vehicles ineligible for the tax credit.

For starters, vehicle price is a large limiting factor that could make or break a purchase for many. Eligible cars must have an MSRP of under $55,000 to qualify, and while trucks, SUVs, and vans have a little more wiggle room, they must still have an MSRP of below $80,000. Eligible purchasers must also meet max income requirements—$150,000 for individuals, $225,000 for the head of household, and $300,000 for joint filers.

There are, of course, limiting factors placed on automakers' shoulders as well.

Vehicles must be assembled in North America to be eligible. Granted, a lot of automakers pushing new battery electric cars are building plants stateside; however, that doesn't help buyers who are eyeing vehicles being sold on product cycles today. For example, the Hyundai Ioniq 5 would be ineligible for the credit since the EV is built at Hyundai's Ulsan plant in South Korea. This puts manufacturers that have already begun assembling vehicles in North America at an advantage, meaning buyers may seek out options like the Ford Mustang Mach-E, which is built at the Ford Cuautitlán Assembly in Mexico, or the Volkswagen ID.4 that's built in Chattanooga, Tennessee.

Assembly location is only one part of the eligibility requirements. Next come the battery components, of which a lot must also come from North America.

The legislation's sourcing requirements break up battery components into two different categories: mineral and non-mineral. At least 40 percent of non-mineral components must be sourced in either North America or from one of the 20 countries that the U.S. has entered into a free trade agreement with by 2023. Come 2029, 100 percent of all materials must be sourced from these origins. On the battery mineral front, at least 40 percent of the minerals sourced for the battery cells must be sourced from North America or the same free trade countries described earlier in 2023. This volume also increases year over year until it reaches 80 percent in 2027.

To make things even more complicated, starting in 2025, any vehicles that have minerals sourced or processed from locations that the U.S. have deemed “countries of particular concern”—namely, China and Russia—would become immediately ineligible. This could be alarming and potentially disruptive for automakers that have parent companies or assembly locations in China, such as Polestar.

Used vehicles won't be required to meet any country of origin requirements. However, they will be subject to other regulations that may be limiting. For starters, used vehicles must at least two years old to be included. The vehicles must be purchased from a dealer and cannot be priced over $25,000. The price cap is perhaps the most relevant qualifier, especially in today's car market. A quick check on your favorite used vehicle marketplace will show just how limited choices are.

Whether the act borders on protectionism is still being largely debated by international players. The European Union and South Korea have reportedly raised concerns about the wording of the legislation. A spokesperson for the European Commission called the act "discriminatory" against foreign manufacturers, while South Korea's trade ministry—with backing from Hyundai, LG, Samsung, and SK—said that the current legislation may violate rules regulated by the World Trade Organization.

For American consumers, the expansion of the EV tax credit could be perceived as a win, though they may not actually reap the benefits of this expansion in the coming months or even years. In fact, an estimated 70 percent of new battery electric vehicles being sold today would become ineligible for the tax credit almost overnight due to the sourcing requirements. It would be admittedly difficult for automakers to pivot sourcing and manufacturing requirements of many ineligible vehicles by the end of their respective product lifecycles, meaning that consumers may need to settle for a used version of their favorite non-qualifying EV later on in life if they want to reap the rewards of a tax credit.

Automakers must now scramble to decode the bill in its entirety and figure out just how to pivot their respective processes to become eligible for one of the world's largest new vehicle markets. President Biden is expected to sign the bill into law later this week.

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