The US federal electric vehicle (EV) tax credit is being revised today to promote domestic vehicle manufacturing.
The updated tax credit, with a maximum value of $7,500, will exclude EVs containing internationally sourced components from eligibility. However, it will also allow buyers to immediately access the credit upon purchasing a qualifying vehicle.
Background
The US has provided a $7,500 tax credit for EV purchases since 2009. A 2022 climate law called the Inflation Reduction Act (IRA) changed the eligibility requirements for the tax credit. The IRA prevented vehicles that include components or critical minerals sourced from “foreign entities of concern” (FEOC) from being eligible for the credit.
However, this new eligibility requirement had no practical effect until today. The Biden administration did not initially define which entities counted as FEOCs. This changed in November, when the administration stated that FEOCs included companies controlled partially or completely by the governments of China, Iran, North Korea, or Russia.
After the administration defined FEOCs, it announced that restrictions on EVs containing internationally sourced components would kick in on January 1.
The effects of the new rules
These restrictions are expected to decrease the number of EVs eligible for the tax credit. They are part of the Biden administration’s efforts to encourage EV adoption while reducing reliance on Chinese components in particular.
China dominates the EV supply chain, despite the presence of ample critical mineral deposits in the US itself. 80% of the world’s lithium-ion batteries are manufactured in China, and 87% of US lithium-ion battery imports come from China.
The entities-of-concern rule will impact many vehicle models’ eligibility for the credit. For instance, the standard-range Tesla Model 3 will have its credit reduced to $3,750 due to its use of a Chinese-made battery. Additionally, the Mustang Mach-E will no longer qualify.
Some GM vehicles may temporarily lose eligibility as well, as the automaker is in the process of changing suppliers for certain components.
However, there’s also good news for those wanting to take advantage of the US EV tax credit. Starting from January 1, the tax credit will also be made available as a point-of-sale rebate for registered dealers. This is a departure from the previous requirement of claiming the credit on tax filings the following year.
The change will enable dealers to provide a deduction of up to $7,500 from the car’s purchase price. This will reduce consumers’ monthly car payments. Dealers will subsequently receive the credit back from the IRS, according to The Hill.
Analysis
Although fewer EVs will be eligible for the tax credit, the tax credit will be easier to claim for vehicles that are eligible.
Overall, the changes are expected to have a negative impact on US EV sales in the immediate future. The new rules are taking effect before US EV makers have gained the ability to source most of their components domestically. Environmental regulations and local opposition could cause it to take years for new lithium mines to open, if they ever open at all.
Some industry watchers believe that the changes are specifically designed to reduce Tesla’s share of the US EV market. Tesla CEO Elon Musk and President Biden have a notoriously frosty relationship.
Image Source: InsideEVs
