Loosened Electric Vehicle Tax Credit Rules Aim to Boost EV Adoption
The U.S. government has recently announced the final regulations for electric vehicle (EV) tax credits, providing potential benefits for both new and used EV buyers. Under the 2022 Inflation Reduction Act, automakers now have more time to comply with specific provisions related to battery minerals’ sourcing. The credits, ranging from $3,750 to $7,500 for new EVs and a $4,000 credit for used ones, are intended to stimulate demand for EVs and support President Biden’s goal of achieving a 50% share of electric vehicle sales by 2030.
One significant change to the tax credits is that this year, buyers can access the credits at the time of purchasing a vehicle from an authorized dealer, rather than having to wait for an income tax refund. However, qualification for the credits depends on factors such as income, vehicle price, battery composition, and mineral requirements that become more stringent each year. To be eligible for the credits, EVs must be manufactured in North America, with some plug-in hybrids also meeting the criteria.
The new regulations also introduce complex rules that gradually promote the development of a domestic electric vehicle supply chain. Starting this year, buyers will not be able to claim the full tax credit if they purchase EVs that contain battery components from countries deemed hostile to the United States, primarily China, Russia, North Korea, and Iran. The aim is to reduce reliance on these countries for critical minerals used in electric vehicle batteries.
In 2021, half of an EV’s critical minerals in its battery must be mined or processed in the U.S. or a country with a free trade agreement with the U.S. Additionally, sixty percent of the battery parts have to be made or assembled in North America. From 2025 onward, batteries containing any critical minerals from nations of concern will not be eligible for any tax credits. However, after considering feedback from the auto industry and others, the treasury officials decided to relax this restriction slightly. Small amounts of certain minerals, including graphite, will be exempt from the restriction until 2027 due to difficulties in tracing their country of origin.
This rule change is expected to increase the number of EVs eligible for tax credits in 2025 and 2026. However, the auto industry states that it is challenging to determine the exact impact until automakers complete the tracing of mineral origins. John Bozzella, CEO of the Alliance for Automotive Innovation, emphasizes that transitioning to EVs requires a monumental transformation of the U.S. industrial base and acknowledges that the rule change makes good sense for investment, job creation, and consumer EV adoption.
One of the challenges for the U.S. auto industry lies in China’s dominance over crucial parts of the EV battery supply chain. Currently, only 13 out of the 114 EV models available in the U.S. qualify for the full $7,500 credit. With soaring sales and a record market share in 2020, the first quarter of this year saw a mere 3.3% growth in EV sales, leading automakers to question whether they had moved too quickly to capture the EV market. In fact, the EV share of total U.S. sales dropped to 7.15% in Q1 2021, according to Motorintelligence.com.
Treasury Secretary Janet Yellen highlights the benefits of the Inflation Reduction Act’s clean vehicle credits, emphasizing that consumers can save up to $7,500 on a new vehicle and reduce annual fuel costs while also creating job opportunities and strengthening energy security. The loosening of tax credit rules is a step toward encouraging EV adoption and supporting the growth of a domestic electric vehicle supply chain.