Manufacturers who make electric cars in Europe — especially Germany — and Asia — especially South Korea — have been mightily upset by the new federal EV tax credit rules. Why? Because many of the EV models that are eligible for the credit now won’t be tomorrow. And they won’t ever be again unless those companies decide to manufacture them in the US using approved battery materials and components.
In theory, as of January 1, 2023, in order to qualify for the EV tax credit, a car must be finally assembled in the US, and cost less than $55,000 for a sedan or wagon, or less than $80,000 for an SUV or light duty truck. There are rules coming that will require the batteries in those cars to use materials and components sourced within the US or from a country that has a free trade agreement with the US, but the Treasury Department says it needs more time to create the rules and regulations that will implement those provisions. It says it should have them ready to go by March, but in the meantime no sourcing rules will be in effect.
New Federal Tax Credit Rules
The Treasury Department issued new guidance on December 29 about the rules that will implement the provisions regarding the federal EV tax credit as provided for in the Inflation Reduction Act. In a surprising example of government doublespeak, Treasury now says no tax credit for you if you buy a foreign-made electric car but if you lease that same car — shazam! — now it qualifies. We want to say right up front that this is a developing story and there is some confusion about the details. We are not the Treasury Department nor have we ever played it on television, but the explanation appears to be as follows:
If a car is leased, technically, it is owned by the leasing company, not an individual consumer. As such, the lease qualifies under the commercial section of the Inflation Reduction Act. The rules for that section are considerably less strict about place of final manufacture and sourcing, according to Reuters. Abracadabra! Just like that, if you lease a KIA EV6, the full $7500 tax credit applies. If you buy the same car from the same dealer after December 31, 2022, you get bupkes from Uncle Sam. Apparently, the leasing exception will apply even after Treasury issues its final rules later this year because the battery materials and components provisions in the IRA are not applicable to “commercial” vehicles.
Does this make any sense? Of course not, but it is the result of heavy pressure from the European Union and South Korea not to penalize manufacturers in those countries. Flocks of lobbyists from French President Emmanuel Macron on down have been traveling to Washington, DC, for the past 5 months to plead for leniency. Hyundai and the Korean government aggressively lobbied the Biden administration to take a broader interpretation of the law’s commercial vehicle clause, which allows vehicles to qualify for the $7500 tax credit without meeting the strict content requirements on batteries and critical minerals that apply to vehicles sold at retail.
Their arguments have a stinger in the tail. If the US persists with these rules, which they claim violate any number of World Trade Organization rules, there will be consequences that could hurt US companies. Diplomacy is all well and good, but it helps to have a club in your back pocket in case you need it.
Officials with the European Union welcomed the new guidance from the Treasury Department, calling it “a win-win” for both sides, according to Politico. “US taxpayers will be able to take advantage of highly efficient EU-made electric vehicles and components, while EU companies that provide their customers through leases with cutting-edge clean vehicles can benefit from the incentives,” the EU said in a statement.
What Is A Free Trade Agreement?
The Treasury Department pulled another rabbit out of the hat on December 29 as well. It claims the IRA contains no definition of “free trade agreement.” Therefore, a free trade agreement is whatever Treasury says it is. The US has no trade agreement with Argentina, for instance, but that country happens to be a major global supplier of battery grade lithium. Ergo, if Treasury wants to rule that lithium from Argentina complies with the materials sourcing requirements of the IRA, it can do so.
“Treasury and the IRS expect to propose that the secretary may identify additional free trade agreements for purposes of the critical minerals requirement going forward,” the agency said on Thursday according to a report by Transport Topics. The agency “will evaluate any newly negotiated agreements for proposed inclusion during the pendency of the rule making process or inclusion after finalization of the rule making.”
Oddly enough, the US has no free trade agreement with the EU. However, Treasury said on December 29 it would identify a list of criteria for what qualifies as a free trade agreement with the United States in a notice of proposed rule making it plans to issue in March. It is possible (likely?) that the EU will qualify as a free trade zone under those rules.
To help guide customers through the legal thicket the Treasury rules have created, the IRS has created a webpage that lists all the cars that will qualify under the new rules that go into effect January 1, 2023. Just keep in mind that there is a different procedure for leased cars. On January 1, 2024, all this EV tax credit goes away and the incentives apply directly at the time of purchase — provided you buy from a dealer, which may of may not apply to Tesla and Rivian. Confused? You aren’t alone.
Joe Manchin Is Not Happy
Joe Manchin, whose vote was crucial to passing the Inflation Reduction Act in August, is not pleased with all these shenanigans by the Treasury Department. In a statement issued on December 29, he criticized the Treasury’s interpretation and urged officials to pause implementation of the commercial electric vehicle clause. He says the agency’s position “bends to the desires of the companies looking for loopholes and is clearly inconsistent with the intent of the law. It only serves to weaken our ability to become a more energy secure nation.”
But Manchin has little grounds to complain about the Treasury’s reading of the law with regard to leased cars, James Lucier, managing director of research firm Capital Alpha Partners, tells Transport Topics. “This is what happens when legislation does not go through regular order and you don’t have a committee looking at all the provisions.” The bill was largely crafted behind closed doors and at high speed between Manchin and Senate Majority Leader Chuck Schumer. “It sounds like the Treasury guidance is doing exactly what the bill said and should come as no surprise,” Lucier said.
In its latest guidance, the Treasury Department outlined the process for carmakers to comply with the IRA’s content requirements on critical minerals and battery components, which may limit automakers’ eligibility for the full tax credit once they go into effect in March. Until then, existing rules that grant tax credits based on the size of an EV battery will apply. Cars will still be required to be assembled in North America to qualify, and subject to price and income thresholds as prescribed by the act, a Treasury official said.
That means automakers like General Motors and Tesla which have reached a 200,000-unit milestone and been phased out of eligible EV sales under previous IRS rules could enjoy an extension of the full credit on vehicles assembled in North America beginning January 1, 2023, and continuing until final rules are proposed in March.
The Tax Credit Takeaway
If the intent of the Inflation Reduction Act was to get more electric cars on America’s roads and highways as quickly at possible, the current situation represents a dismal failure. Confused people usually defer buying decisions until they gain some sort or clarity. Nobody wants to think they have to hire an attorney or an accountant just to buy a car. It’s not really Treasury’s fault. Treasury was handed a piece of flawed legislation and told to do the best they could with it. But as a former college roommate liked to say, “The best is none too good.”
This will all get straightened out eventually, but the leasing workaround may not sit well with a lot of people once the reality sets in. For one thing (we would never suggest dealers don’t have the customer’s best interests at heart), it doesn’t take a Nobel prize–winning economist to wonder whether most of the federal tax credit won’t wind up it the pockets of leasing companies instead of the customer’s.
It will take a while to sort all this out. Sadly, it seems like people will have an incentive now to wait until January 1, 2024, before deciding to join the EV revolution. That is clearly not what was intended, but sometimes laws have unintended consequences. At least there will be more time now to focus on expanding America’s EV charging infrastructure before a flood of new electric cars takes place.
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