Changes to the federal electric vehicle (EV) tax credit are set to take effect Jan. 1, reflecting a push by the Biden administration to focus the financial incentives on domestically produced vehicles.
The changes to the tax credit, which tops out at $7,500, will exclude certain EVs that include internationally sourced components from eligibility, while for the first time allowing some buyers to access the credit right after buying an eligible vehicle.
These changes stem from a central provision of the Inflation Reduction Act (IRA), the sweeping climate and infrastructure law President Biden signed last year.
The provision barred vehicles including components or critical minerals from “foreign entities of concern” (FEOC) from being eligible for the credit. In November, the Biden administration issued rules for determining which entities fall under this disqualification. This includes companies fully or partially controlled by the governments of China, Iran, North Korea or Russia.
These restrictions are expected to reduce the number of vehicles eligible for the tax credit, but are part of the Biden administration’s efforts to promote EV adoption while reducing reliance on Chinese components in particular. China controls much of the supply chain for EVs, dominating the refinement and production market for many of the critical minerals that are used in the vehicles’ batteries — even though the U.S. itself has many known deposits of those minerals.
Starting Jan. 1, the tax credit will also become redeemable as a point-of-sale rebate among dealers registered with the IRS, whereas previously car buyers needed to claim it on their taxes the following year.
“The effect of that was you didn’t’ get any deduction on your monthly payment … people were paying more up front [and] you’d get some money back later,” said Sam Abuelsamid, an analyst with Guidehouse Insights.
Under the 2024 changes, “those dealers will be able to knock that up to $7,500 off the purchase price of the car,” he added. “That means that you have a lower monthly payment, EVs are going to be more affordable to more people, and the dealers get the credit back from the IRS after the sale is made.”
The entities-of-concern rule, meanwhile, will strip multiple vehicle models of their eligibility for the credit, Abuelsamid said. These include the standard-range Tesla Model 3, which will see its credit cut in half to $3,750 due to its use of a Chinese-made CATL battery, and the Mustang Mach-E, which was previously eligible for the $3,750 credit but will be fully disqualified following the changes.
Certain GM vehicles may also temporarily lose eligibility, he added, due to components that are currently sourced from Chinese suppliers but which the automaker is in the process of resourcing.
Ultimately, the changes will shrink the pool of eligible vehicles, but they will make it easier overall for consumers to buy an electric vehicle, according to Abuelsamid.
“What it will do is, it will make it easier for more consumers to purchase those vehicles who are eligible, so we may see an uptick in sales” among eligible vehicles, he said. “If they had to pay $50,000 as opposed to $42,000 the difference in the monthly payment might have been more than they can afford.”
“We’re starting to see some of the intended impacts of the IRA, which is to promote onshoring and localization of battery production and battery material production, and that’s going to be accelerating over the next couple of years,” he added.
At face value, the point-of-sale rebate would seem to be the change that most directly affects consumers. However, the foreign-entities-of-concern rule could potentially lead to a disruption of supply chains that trickles down to potential EV buyers, according to David Foster, a Distinguished Associate at the Energy Futures Initiative who served in the Obama Energy Department.
“The [FEOC rule] could definitely create problems relating to the supply chain—one of the things we all learned during the pandemic is if you don’t have close-by, resilient supply chains, you can have a lotof problems,” he said, citing pandemic-era chip shortages. “If we don’t manage getting this critical minerals issue under control and leave some of it in thehands of foreign entities of control we’re going to end up with those bottlenecks all over again.”
Another wrinkle for industry, Foster said, is that the FEOC restrictions will not apply to raw materials used in EV batteries until 2025.
“That’s created a certain level of consternation on the part of companies that were investing in mining some of the very minerals that were necessary to get the materials for the car itself,” he said. “[It] has really concerned a number of stakeholders, starting with mining companies themselves, many of whom have been looking at increased mining of copper, lithium and nickel here in the United States.”
Another critic of the FEOC guidance has been Sen. Joe Manchin (D-W.V.), who was key to the passage of the IRA but has become a vocal detractor of its implementation. Manchin, who is not seeking re-election in 2024, said the guidance as written allows for “workarounds” for the Chinese critical mineral industry.
“The Inflation Reduction Act clearly states that consumer vehicles are ineligible for tax credits if ‘any of the applicable critical minerals contained in the battery’ come from China or other foreign adversaries after 2024,” Manchin said earlier this month. “But this administration is, yet again, trying to find workarounds and delays that leave the door wide open for China to benefit off the backs of American taxpayers.”
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