The Inflation Reduction Act was enacted to accelerate the shift to electric cars, among other climate goals.
According to the law, electric vehicles and plug-in hybrids assembled outside North America are not eligible for the full $7,500 tax credit. That may make it more difficult for consumers to purchase battery-powered cars.
A certain percentage of the components and minerals in car batteries must be sourced from the United States or from countries that are its trade allies, Treasury Department regulations tightened this week.
Currently, 11 electric cars from four automakers – Tesla, General Motors, Ford Motor and Volkswagen – qualify for the full tax credit; others may qualify for a partial $3,750 credit.
The rules are already driving big changes in the buying and selling of electric cars. Some automakers who are no longer eligible are now pushing leased electric cars. Because the law allows leased vehicles to qualify as commercial vehicles, which are exempt from the same restrictions as cars bought by individuals, leased vehicles qualify as commercial vehicles.
Despite falling prices, electric vehicles still cost $58,940 on average in March, nearly $11,000 more than a typical new car, according to Kelley Blue Book.
Interviewed by the New York Times in Portland, Ore., Ethan Derner and his fiancée, Lorien Sekora, share two electric Kias. Although Mr. Derner considered replacing his car with a more fuel-efficient model, he gave up after realizing that the vehicles he wanted were either too expensive or not any more practical than his current model. His lease on his Kia Soul has been extended, and he is looking for a more affordable model that qualifies for a tax credit.
A Rivian is the only other model I’m considering now, but it’s beyond my price range, Mr. Derner said. Despite being built in Illinois, Rivian’s R1T pickup truck and R1S SUV were not eligible for a tax credit due to battery sourcing requirements.
“Until I can drive to Seattle and back without anxiety,” Mr. Derner said, “I won’t buy an electric vehicle outright.”
About 80 percent of people surveyed by Cars.com who were shopping for an electric vehicle said tax credits played a significant role in their decision.
Several industry experts and consumers have praised the law’s multipronged mission, including curbing greenhouse gas emissions, creating jobs, and blunting China’s dominance in battery and mineral processing. Automakers, battery companies, and other companies have announced plans to invest more than $100 billion in electrifying the U.S. auto industry since Biden took office.
However, the rules may impede the goal of getting more people to buy electric vehicles – at least in the short term.
The system was made complicated for a reason, but it’s causing all kinds of chaos for consumers in the meantime, according to Consumer Reports senior policy analyst Chris Harto. In the short term, it’s going to hurt companies that aren’t eligible and help companies that are.”
Hyundai Motor, which also owns Kia and Genesis, appears to be dealt a particularly tough hand by the reshuffled credits.
Hyundai Ioniq 5 and Kia EV6 have won industry accolades and impressed buyers with attractive designs and some of the fastest charging times in electric vehicles. However, they are built in South Korea and do not qualify for federal tax breaks.
According to Kelley Blue Book, even though Hyundai and Kia car sales went up in the first three months of the year, their electric vehicle sales plummeted by 25 percent. As a whole, electric car sales soared in the first quarter, on track to surpass one million vehicles by 2023, and now account for 7.2% of all new car sales.
In recent months, the credit rules have changed rapidly. Genesis’ first American-built vehicle, the Electrified GV70, began rolling off a Hyundai assembly line in Alabama after 16 hours of assembly. In spite of Genesis executives’ hopes that the model would qualify for a credit, the Biden administration released tougher rules this week that did not allow the model to qualify.
Hyundai and other automakers are attempting to lure buyers through leases to compensate for the loss of tax breaks. According to the administration’s broad interpretation of the law, leased electric cars are eligible for tax credits regardless of whether they are manufactured overseas and are not subject to the government’s rules regarding battery components, minerals, household income caps, or vehicle prices.
As a result of the commercial credit, car dealers can lower the price of the car in lease transactions, which could mean lower monthly payments for consumers. If consumers applied the full $7,500 credit to a lease over three years, they could save about $225 per month, or $125 per month over five years, according to Russell Datz, Volvo’s spokesman.
A new SUV, the EX90, will be assembled at Volvo’s South Carolina factory starting this year. The automaker, based in Goteborg, Sweden, currently sells two electric models in the United States that are manufactured in Belgium and do not qualify for federal tax credits.
In September, after the law’s passage, only 7 percent of consumers leased an electric vehicle, according to Edmunds.com. By March, leases accounted for 34 percent of electric vehicle sales.
In February, Gary Murphy, a retired educator in Castle Rock, Colo., leased an Ioniq 5 from a dealer who had heard about the commercial credit the previous day.
We didn’t plan on leasing a car, but when they confirmed we could get $7,500 on a lease or nothing to pay, that was too good to pass up.
When he finally located the Ioniq 5, he had to wait for several months for three different electric models, which were in short supply.
“You can get the credit, but you can’t get the car,” Murphy said.
The use of credits for leased vehicles has angered some automakers and lawmakers who say it subverts the intent of Congress. Consumers can lease any electric vehicle for $7,500. Although the Mercedes-Benz AMG EQS is made in Germany and far exceeds the $55,000 price cap for electric sedans to qualify for the tax credit, a couple earning more than $300,000 can lease it for $148,000 and claim a $7,500 credit, even though the couple’s income exceeds $300,000.
Tax credit for leased cars has been allowed by the Treasury because it is legally sound, according to Treasury officials. To encourage rental car companies and local governments to buy electric vehicles, the Inflation Reduction Act exempted commercial vehicles from the restrictions.
Most consumers prefer to buy and own cars, in part to avoid lease limits and excessive wear and tear penalties.
He says Hyundai and Genesis Motor North America are suffering from a huge marketplace disadvantage as a result of the loss of buyer credits. In spite of Hyundai’s financial handicaps, the Ioniq 5 and Ioniq 6 remain competitive, according to the chairman of Hyundai’s national dealer council, Kevin Reilly.
In the United States, the Ioniq 6 is the longest-range and most energy-efficient mass-market electric car. According to the Environmental Protection Agency, it can travel up to 361 miles on a full charge and get 140 miles to the gallon.
Mr. Reilly, the owner and president of Alexandria Hyundai in Virginia, believes customers will evaluate the whole picture, not just whether an E.V. qualifies for credit.
A leasing option also has other advantages, Reilly explained. People who are hesitant to switch to battery-powered cars don’t have to worry about resale value or long-term commitments. After their leases expire, customers can easily upgrade to a more affordable model as electric vehicle technology advances.
While some car buyers said they supported the Inflation Reduction Act, they would only buy electric cars eligible for tax credits.
To ferry his three daughters around town, Jonathan Quarles spends more than $150 per week filling up his Ford Expedition. An electric Ford Mustang Mach-E is eligible for a federal tax credit of $3,750, so he plans to replace it with it. After watching manufacturing jobs leave the country for decades, he has little sympathy for automakers whose cars did not qualify for credits.
He said, “From my perspective, you should have built those factories long before the credit became available.”