In addition to its more obvious goal of reducing inflation, the Biden administration’s Inflation Reduction Act (IRA) was designed to force sweeping changes in the electric vehicle market. The legislation revises tax credit rules for EVs as it seeks to build up domestic battery production so the US doesn’t cede the supply chain to China.
It’s also very confusing, because new EV tax credits depend not only on where the cars are built, but also where batteries are assembled and where battery materials come from. These rules should all go into effect on January 1, 2023 — that’s next weekend for anyone keeping track.
However, it will now take a little longer for all the new provisions to come into effect. On Monday, the Treasury Department announced that decisions on some aspects of the electric vehicle tax cuts will be delayed until March. By postponing rules around the origin of battery minerals, but allowing other rules to go into effect on January 1, the Treasury Department has created an interesting situation for several electric cars built in North America.
It will take some time before all the new provisions are in effect
For anyone not following the exciting world of the supervision of the Ministry of Finance — and really, you’re missing out if you don’t — what this means is that several EVs will now continue to qualify for the full $7,500 EV tax credit for the first few months of 2023 and possibly beyond. And this means you could score a good deal on one of these EVs in the next quarter, provided you can find one.
Under the IRA’s new rules, the full $7,500 EV tax credit, which would go into effect Jan. 1, is only available to cars assembled in North America. But according to Reutersit also depends on whether the batteries meet two factors that add up to $3,750 each.
One half is based on the EV battery that has at least 40 percent of its critical minerals sourced from the US or one of its free trade partners; the other half is based on the EV battery with at least 50 percent of its components manufactured or assembled in North America. The intention is that these percentages will also increase in the coming years. This is because the IRA tries to ensure that batteries are sourced and built in North America, not just in the cars themselves.
Some new securities of the IRA, such as caps on buyers’ income and vehicle prices, still goes into effect on January 1. Those rules are designed to force the EV market in a more affordable direction.
You could score a good deal on one of these EVs in the next quarter, provided you can find one
But on Monday, the Treasury Department announced a delay in guidance around critical minerals rules, even as the other rules take effect. This means that certain vehicles will continue to be eligible for the full tax incentive for a while, even though they may not remain so in the long run. (Most automakers don’t currently meet that requirement and have been warning for years that it won’t.)
The big winners (for now) are North American-built EV sedans and smaller cars starting under $55,000 and SUVs and trucks starting under $80,000.
Yahoo! Finance reports this is a big win for Tesla and General Motors in particular. Both had completely lost their EV tax credit under the old rules as they hit the 200,000 car sales threshold. Now GM and Tesla are back in the game, but not yet committed to the tough battery sourcing requirements. (The new IRA rules have no limit on the number of EVs sold.)
EV news site Electrek says this directly: “The Chevy Bolt is about to be a screaming deal – at least until March.” Previously, GM CEO Mary Barra had said the company’s cars should qualify for the full $7,500 tax credit in two to three years while working on procurement requirements. This decision preserves tax incentives for the Bolt and Bolt EUV, as well as the $62,990 Cadillac Lyriq crossover.
A big win for Tesla and General Motors
Ford, Nissan, Rivian and Volkswagen electric cars built in North America will also be eligible for the full tax credit starting January 1, regardless of where their batteries come from. Others aren’t so lucky here. Hyundai and Kia for example are excluded because their EVs are built in South Korea. Tesla’s Model S and Model X are also excluded because they are too expensive to qualify under the new rules.
We’ll find out more about where this is all going shortly, but the Treasury Department delay gives the eligible cars at least three months which buyers might do well to take advantage of.
“Before the end of the year, the Treasury Department will also release information on the expected direction of the critical and battery component requirements that vehicles must meet to qualify for tax breaks under the Inflation Reduction Act,” the department said in a statement. “The information will help manufacturers prepare to identify vehicles eligible for the tax credit when the new requirements go into effect… Under the law, the essential requirements for mineral and battery components will not take effect until after the Treasury that proposed rule.”
“Under the law, the critical requirements for mineral and battery components will not take effect until the Treasury has issued that proposed rule”
Right now, the IRA’s production rules are a pretty daunting task for many auto companies. In today’s supply chain, most of them have batteries, minerals and components largely sourced from other countries, especially China. That reports CNBC, China alone accounts for about 70 percent of the global battery cell supply. The IRA is designed to level the playing field, reduce US battery dependence on China and create US jobs in the EV sector. Many automakers and their supplier partners are therefore now working to strengthen US battery factories.
Not surprisingly, the new IRA rules have already been derided as disruptive by some automakers. For example, Hyundai Motor Group is in a particularly difficult position; its Hyundai, Kia and Genesis brands combine to make up some of the top EV sellers in the US, but its US factory plans years away from meeting the full tax incentive requirement.
It has been found that the need for minerals is particularly difficult to parse, let alone state, such as Reuters reported last week, which likely led to Monday’s announcement. In addition, sourcing of battery minerals in the US can have a detrimental effect on areas near native reserves where many deposits have been found.
The biggest impediment to the positive developments in Treasury news is still that new cars can be extremely difficult to find, especially without obscene markings. It wasn’t a great year to buy new cars, and we can fully expect these headaches in 2023. At the time of writing, a quick search on Cars.com reveals only 578 new Chevrolet Bolts and only 1,018 Bolt EUVs for sale nationwide. But if you can find one, Q1 2023 could be a very favorable time to pull the trigger.
Will these rules change again? That feels very possible; the IRA is a large-scale shift in how we buy EVs and, ultimately, how and where they will be built. In the meantime, you should consult a list of vehicles that qualify for the tax benefits, such as this one Bee Consumer Reportsand just keep an eye on the deals if you want to go electric.