The Inflation Reduction Act signed into law in August significantly altered the federal tax credit for electric cars. Previously, it was only available for the first 200,000 electric cars manufactured by any one automaker. Tesla exceeded that limit in January, 2020, General Motors exceeded the limit in April, 2020, and Toyota exceed it in October of this year.
New Federal Tax Credit Rules For EVs
Under the IRA, those production limits are gone. As of January 1, 2023, the new federal tax credit for electric cars will be available to all manufacturers through 2032. There are some restrictions, however. First, all cars that qualify must be finally assembled in the United States (or Canada or maybe Mexico — it’s complicated). Second, the materials used to make their batteries must meet certain domestic production targets (the percentage will ramp up over time).
Third, the components used to make those batteries also have to meet certain domestic production targets (once again, the percentage will ramp up over time). Fourth, there is a maximum sale prices for cars and other for SUVs and light trucks. Fifth, there are income limitations that apply to the buyer. Congress can write legislation, but it is up to the executive branch to write the rules that carry out the intent of new laws. The battery materials and battery components requirements are exceedingly complex, primarily because, until now, there was no need to verify the entire supply chain for every molecule of materials and every transistor in battery components. Now there is.
The task of writing the rules has fallen to the Treasury Department and it has just sent up a white flag to say it is overwhelmed and won’t be able to complete the materials and components rules on time. In a press release, it says it will be March — at the earliest — before it can get the job done.
Rule Making Ain’t For Sissies
If you think all this rule making stuff is easy, forget about it. Here’s what Treasury has to say:
Before year’s end, Treasury will release information on the anticipated direction of the critical mineral and battery component requirements that vehicles must meet to qualify for tax incentives in the Inflation Reduction Act. The information will help manufacturers prepare to be able to identify vehicles eligible for the tax credit when the new requirements go into effect.
Treasury will issue a notice of proposed rulemaking in March with proposed guidance on the critical minerals and battery components requirements. By statute, the critical mineral and battery component requirements take effect only after Treasury issues that proposed rule. Additional guidance on clean vehicles for consumers and manufacturers is forthcoming.
Since the Inflation Reduction act was signed into law in August, Treasury has worked expeditiously to write the rules that will make real the promise of this legislation. Within days of the law’s enactment, Treasury issued guidance on the electric vehicle tax credit and worked closely with DOT and DOE so consumers could easily find a list of eligible vehicles online.
In the fall, Treasury held a series of stakeholder discussions with Secretary Yellen and Deputy Secretary Adeyemo to solicit input from key groups representing millions of workers, thousands of companies, and trillions of dollars in investment assets, as well as climate and environmental justice advocates, community-based organizations, and other key actors that are critical to the success of the Inflation Reduction Act. Treasury also hosted three formal consultations with Tribal governments and Alaska Native Corporations to hear first hand from Tribal leaders about provisions in the law that directly affect Tribal nations.
In addition, Treasury has solicited and is reviewing thousands of public comments from trade associations, carmakers, labor groups, state and municipal leaders, consumers, foreign governments, utility companies, climate advocacy organizations, think tanks, and more.
What Does It All Mean?
The upshot of all this defugulty is that, as of January 1, 2023, electric cars manufactured by Tesla, General Motors, and Toyota will once again be eligible for the federal tax credit provided final assembly takes place in the US. However, the sales price limits and income limits on buyers will apply. For those who have forgotten what those limitations are, here’s a recap.
The sale price may not exceed $55,000 for sedans and wagons or $80,000 for SUVs and light trucks. An SUV is what the EPA says it is. For instance, a Honda HR-V is classified as a wagon, while the Subaru Outback is classified as an SUV. The determining factor seems to be ride height. Expect manufacturers to quietly increase the ride height of some vehicles to move them into the SUV category. The law also limits the new tax credit to individuals with an income of $150,000 or less; $300,000 or less for those taxpayers who are married and file a joint tax return.
Meeting The New Federal Tax Credit Rules Will Be Hard
Mary Barra, CEO of General Motors, said recently that when those battery materials and components rules kick in — which will be in March of 2023 at the earliest — the electric cars GM manufactures, including the Bolt and Equinox EV, will only be eligible for half the credit. GM apparently has the 40% requirement for materials covered but not the components piece. She says it will be 2 to 3 years before all electric vehicles from The General qualify for the full $7500 tax credit. There is every reason to believe all other US automakers will be faced with similar challenges when it comes to satisfying the rules that Treasury is busy writing now.
Eventually, the idea of a battery passport as proposed by the Global Battery Alliance may become accepted as a way of verifying that a battery adheres to all the strictures required by regulators in the US and the EU in order to qualify for government incentives.
More Changes Coming In 2024
When 2024 rolls around, the federal tax credit rules will change once again. Starting January 1, 2024, the credit can be applied directly at the point of sale if the vehicle is purchased from a dealer. The dealer will get an advance payment of the consumer’s tax credit from the federal government. As a result, CNBC says, consumers can likely receive the full tax credit at the point of sale from the car dealer as a discount on the sticker price or a reduction in the vehicle’s down payment even if they don’t have a tax liability.
“It makes the credit much more valuable to people, especially people who are of moderate income and don’t have a lot of money sitting in their pockets for the down payment,” Joe Levine, executive director of Plug In America, tells CNBC.
That’s when the whole electric car game will change in America. There will still be sales price limits, personal income limits, battery materials and components limits, and point of final assembly limits, but for cars that qualify, the EV incentive will convert to a point of sale rebate for all practical purposes instead of a tax credit. The upshot is that, for some people, they may be better off waiting to buy their electric cars until 2024.
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Source: Clean Technica