Do the Current EVs in the Market Qualify for the Newly Expanded Tax Credits for Electric Vehicles?

U.S. Congress is set to approve expanded tax credits for electric vehicles (EVs), but policies under the new tax cuts effectively disqualifies every EV available in the market.

This is due to a stipulation that to qualify for the tax credits, the EVshould run on a battery made in North America. Most existing EVs actually run on lithium ion batteries made in China, which has a tight hold of the EV battery market, having a 76 percent share, and the U.S. taking only eight percent.

The Inflation Reduction Act of 2022, which the U.S. Senate passed this weekend in a party-line vote, requires batteries to have at least 40 percent of materials sourced from North America or a US trading partner by 2024 to qualify for a $7,500 tax break. The rule states that by 2029, battery components need to be 100 percent produced in North America.

Batteries Sourced From 'Foreign Entity of Concern' Not Eligible for Tax Cuts

Batteries that have minerals that sourced from "a foreign entity of concern," which is defined as a state sponsoring terrorism or countries blocked by the U.S. Treasury Department's Office of Foreign Assets Control, won't be qualified for the credit. China is listed as a "foreign entity of concern" by the U.S. federal government.

U.S. Democrats, which includes West Virginia Senator Joe Manchin, negotiated the new legislation in secret with Senate Majority Leader Chuck Schumer, carry a a tough stand against China this year. But the auto industry notes that these new requirements would basically render every EV on the market today ineligible.

Figures from the Alliance for Automotive Innovation show thar there are currently 72 EV models available for purchase in the United States, which includes battery, plug-in hybrid, and fuel cell electric vehicles. Of those models, 70 percent are ineligible for the tax credit when the bill passes into law. And by 2029, when the strict sourcing requirements go into effect, none would be eligible for the full credit.

New Rules a 'Major Setback' to Boost EV Sales

"The law pushes ttha $7500 credit, but no EV will qualify for this purchase incentive in the next few years, Alliance for Automotive Innovation president and CEO John Bozzella emphasized in a blog post. As a result that would be a "major setback" to targets of a "40-50 percent rise in electric vehicle sales by 2030."

While the auto industry agrees that the domestic supply chain needs serious investment, Bozzella said this should not come at the expense of customer incentives. EVs are essentially more expensive than regular gas-powered vehicles, and tax credits are needed to boost EV sales until battery costs are low enough to compete with internal combustion engine vehicles.

Automakers may seek waivers from the requirements of the impending law, with the precedent that permitted many automakers to avoid "Buy America" enacted in the bipartisan infrastructure law last year, Politico revealed. One example is the requirement that new road and bridge projects use domestically produced steel. However, most states were able to waive those requirements to procure cheaper steel from overseas.

The Zero Emission Transportation Association, of which prominent EV makers like Tesla and Rivian are part of, isn't currenty seeking waivers. Compliance deadlines, the group said, may be extended by a year or more in order to allow the industry more time to adjust to the new rules.

To comply with law can be done, as what Tesla showed. Tesla sources from North American suppliers for its elsectric vehicle component, with 65 percent of these parts used to manufacture the Tesla Model 3 (Long Range, Standard Range, and Performance) brought in from the US and Canada. Tesla has four models that stay on top of the annual automotive index that measures the amount of US-manufactured content in vehicles.

However, it may still take several yearss before the US can start to challenge China's dominance in the EV battery market. Ford and South Korean battery maker SK Innovation spent $11.4 billion on several new facilities in Tennessee and Kentucky, while General Motors is planning four new battery manufacturing facilities in the US with partner LG Chem. Toyota said it would build a $1.29 billion factory in North Carolina. And, Stellantis, parent company of Dodge, Jeep, and Chrysler, selected Indiana as the location for its first battery factory.