Fewer EVs will qualify for the federal $7,500 tax credit under updated rules

The Biden administration released a long-awaited update to the rules governing which electric vehicles are eligible for a tax credit, and while we still don’t know which vehicles will meet the new standards, one thing is for sure: fewer EVs are going to qualify.

The new rules, which were published by the Treasury Department on Friday, address outstanding issues related to the source of the critical minerals contained within an EV battery. Under the Inflation Reduction Act (IRA), only electric vehicles with battery materials sourced from the US and its approved trading partners will qualify for the $7,500 credit. 

That represents a serious challenge to most automakers — and now for customers interested in buying an EV. Under the current supply chain, the vast majority of EVs have batteries, minerals, and components heavily sourced from other countries, China in particular.

China alone accounts for some 70 percent of the global supply of battery cells. Lawmakers have said that the IRA is meant to level the playing field by weaning American battery dependency off China and creating US jobs in the EV sector. Many car companies and their supplier partners are now working to beef up US battery plants as a result. 

But most of the EVs on the market today still run on Chinese-made batteries. And automakers are left scrambling to figure out what the updated rules mean for them.

John Bozzella, president and CEO of the Alliance for Automotive Innovation, which represents most of the major auto manufacturers in the US, said he still can’t say with certainty which EVs qualify under the new rules.

“It’s not a question that can be answered today,” Bozzella said in a statement, adding that automakers will report directly to the Internal Revenue Service which EV models meet the updated critical mineral and battery component requirements.

“Here’s what I can say,” he added, “this latest turn will further reduce the number of eligible EVs. Fewer vehicles (and fewer customers) will qualify for the full $7,500 credit in the near term. In fact, this period may go down as the highwater mark for EV tax credit eligibility since the IRA passed last year.”

The rules were supposed to go into effect January 1st, but the IRS needed extra time to figure out how to enforce them, delaying its guidance until the end of March. The new criteria will take effect April 18th, when a list of qualifying models is expected to be published. Until then, car buyers can claim the full tax credit when they buy vehicles that are currently eligible — and before more are expected to drop off the list.

Although the guidance takes effect next month, it isn’t final and will go through a 60-day public-comment period.

The rule that EVs must be manufactured in North America went into effect at the beginning of the year, eliminating upward of 70 percent of EVs on the market from eligibility, according to the Alliance. In addition, a set of income requirements and price caps went into effect that month: sedans that start under $55,000 and SUVs and trucks that start under $80,000 qualify for the credit.

When the Treasury Department released the last set of rules back in January, just 37 EV models qualified for the credit (about 40 percent of the 91 EV models for sale today), according to the Alliance. This latest update is expected to whittle that list down even more.

The IRA requires EV batteries to have at least 40 percent of materials sourced from North America or a US trading partner by 2024 in order to be eligible for a $7,500 tax break. By 2029, battery components would have to be 100 percent made in North America.

Batteries that contain minerals that “were extracted, processed, or recycled by a foreign entity of concern,” which is defined as a state sponsoring terrorism or countries blocked by the Treasury Department’s Office of Foreign Assets Control, would be ineligible for the credit. China is listed as a “foreign entity of concern” by the federal government.

Last summer, auto industry officials were predicting that, by 2029, when additional sourcing requirements go into effect, zero EVs currently on the market would qualify for the full credit.

Bozzella said it’s possible that some EVs will qualify for a partial credit, but more interpretation is needed to know for sure. “Given the constraints of the legislation, Treasury’s done as well as it could to produce rules that meet the statute and reflect the current market,” he said.

The auto industry has been urging the Biden administration to consider free trade agreements that could include mineral agreements with the European Union and Japan. And indeed, the Treasury Department listed more than 20 countries, including Australia, Canada, Mexico, and South Korea, as free trade agreement countries that qualify under the critical minerals rule. Japan was added as well in an agreement “containing robust obligations to help ensure free trade in critical minerals,” the department said.

Bozzella said those discussions between the US and our allies are ongoing, “which is positive and will help more quickly reduce reliance on China.”

But key lawmakers aren’t content to wait. Senator Joe Manchin (D-WV), who helped negotiate the IRA’s provisions related to the EV tax credit, introduced a bill earlier this year that would claw back the credit that was given to any EV that doesn’t meet the strict battery requirements.

Other lawmakers took issue with the original language in the bill, expressing concern over how it will effect the domestic auto industry.

“As I have said before, the electric vehicle tax credit language as written was not well thought out,” Senator Debbie Stabenow (D-MI) said in a tweet. “Despite this, we need this law to work & today’s guidance from the Treasury Department is an important step in the right direction and I applaud the Department for its hard work.”

Meanwhile, many automakers are resigned to the fact that they are losing the tax credit. Tesla, for example, said it expected the rear-wheel drive version of the Model 3 sedan to become ineligible following the updated guidance based on the fact that the battery comes from China.