The Inflation Reduction Act reshapes the electric car market, for good and ill. Here’s what it means for car buyers now and going forward.
On August 16th, President Biden signed the Inflation Reduction Act into law. The new bill was a trimmed down version of Democrats’ Build Back Better agenda, sculpted especially to garner the support of moderates Senators Joe Manchin of West Virginia and Kirsten Sinema of Arizona.
As passed, the bill aims to lower prescription drug costs, reduce insurance premiums and expand insurance coverage, and deliver tax reform and increase tax enforcement. But the bulk of the bill, some $369 billion dollars is dedicated climate change mitigation and adaption. Despite the title, the Inflation Reduction Act will probably only have downstream, long-term effects on tamping down today’s high inflation. Instead, it’s the largest and most ambitious climate change bill ever passed by Congress.
Unlike prior proposals, the IRA features a lot more carrots, like tax credits and grants, than sticks, like a carbon tax and new regulations. The hope is, strong enough incentives can move the ball forward where more heavy-handed tactics have failed. And one of the centerpieces of the legislation is a new round of EV tax credits to help increase EV adoption rates and accelerate the shift to cleaner cars.
Below we’ll explore how the legislation both succeeds and fails in this mission, and which EVs and PHEVs (plug-in hybrid vehicles) are and are not eligible for the new $7,500 tax credits.
While we do know which vehicles on sale today qualify for the new tax credits, it’s not at all clear which will be eligible going forward. That’s because the IRS will be writing the rules for those tax credits with a deadline of Jan 1, 2023. The new tax credits come with new stipulations. First, the bill requires that vehicles be built in Canada, the US, or Mexico. This excludes entire carmakers from current eligibility, including Hyundai/Kia/Genesis, Porsche, Polestar, and Jaguar/Land Rover.
Second, starting in 2023, all batteries must be manufactured in the countries with a US trade agreement. This list totals around 20 countries and includes Canada, Mexico, Australia, and South Korea. Initially, the bill requires 40% of non-mineral battery components to sourced from the approved countries. That percentage ratchets up to 100% by 2029. (The percentage represents the cost, not the weight or volume of the battery.) Batteries’ mineral content will follow similar rules also starting at a 40% threshold and rising to 80% by 2027. EVs built in North America in 2022 will be exempted, with enforcement starting in 2023.
The final major rules are the price and income caps. Starting in 2023, the eligibility of EVs and PHEVs will be capped at $55,000 for cars and $80,000 for trucks and SUVs. The income caps for the tax credits are $150,000 for single filers and $300,00 for joint filers, applying specifically to adjusted gross income. For used vehicles, the price cap is just $25,000. The vehicle will also need to be at least two years old and the tax credit itself will be either $4,000 or 30% of the vehicle’s value, which ever is less.
It’s the above that makes it difficult to say with certainty which vehicles, current or future, will qualify for the tax credits. Companies aren’t currently public about the sourcing of their battery materials. The bill also bans materials sourced from “countries of concern” that include Russia and China among others by 2025. The speed with which the IRA was announced and passed means companies will be playing catch up to ensure their offerings in 2023 and beyond can qualify.
Under the old rules and today, an EV tax credit is assessed at tax time and taken against what you owe the federal government in taxes. With the IRA, the tax credit for EV purchases will be applied at the time of purchase, rather than having to wait around until after you’ve filed your taxes. Unfortunately, this won’t go into effect until 2024, meaning all 2022 and 2023 purchases will still be applied at tax time.
So which EVs and PHEVs can you get a tax credit on in 2022? First, cars with a purchase agreement signed before August 16th will still qualify under the old rules. Under the new rules, many EVs and PHEVs don’t qualify, either due to where they were manufactured, battery sourcing, or because those manufacturers have already used up all their tax credits for the year, like Tesla and GM.
There are a few vehicles in 2022, albeit a minority, that are eligible for the new tax credits. Those are the Audi Q5 PHEV, the BMW 330e and x545e PHEVs, the Chrysler Pacifica PHEV, Fords like the Escape PHEV, the F-150 Lightning, Mach-E, and E-Transit, the Lincoln Aviator and Corsair PHEVs, the Jeep Wrangler 4xe PHEV, The Nissan Leaf EV, the Rivan R1T and R1S EVs, the Volvo S60 PHEV, the Mercedes-Benz EQS and EQE EUVs (electric SUV), and the Lucid Air.
In the coming year, more EVs will qualify, at least based on where they were manufactured and their price. Exact battery composition and the rules surrounding them are still big unknowns. Likely qualifiers include the Tesla Models 3 and Y, as will the new Silverado electric truck, the Chevy Bolt, the Cadillac Lyriq, and the new Chevy Blazer EV. Honda/Acura products built in the US will also likely qualify thanks to the Honda’s use of GM’s Ultium EV platform.
The signing of the IRA might have felt like a triumph for some, but the real work of implementation has only just begun. As outlined above, many of the bill’s protectionist provisions will, at least in the short term, make both EV manufacturing and EV adoption more complicated and, in many cases, expensive. The literal opposite of the overall intent of the bill.
The stipulations entailed in EV tax credits are flat out cumbersome. In part, that’s intentional. Protectionism and an overall skepticism of globalism are on the rise, here and around the world and many of the rules are intended to promote American manufacturing. But the mining, refining, and manufacture of battery components involve a lot of companies upstream from car building, all of which will need to scale to meet demand and be shifted to the US and its trade partners. At least when it comes to EVs, supply chain woes will be a long-term issue.
And then there are the price caps which mean many of today’s high-priced EVs won’t be eligible at all. The cap on used EVs is especially troublesome given the inflation in used car prices. The side effect of this is less consumer choice when it comes to new EVs, which may, in the short term at least, hold back EV adoption.
It’s likely manufacturer will be asking for waivers for some of the new rules. (Localities have been granted waivers for the new regulations that come out of this year’s new infrastructure bill, so there’s at least a chance the IRS will grant such requests from automakers.)
The hope is, the IRS will make use of at least some of its $80 billion dollars infusion provided by the IRA and write rules and offer waivers such that the automotive industry and broad electrical vehicle adoption can indeed more forward apace. That’s right, all we need do is have faith in the IRS…but as it goes in public policy and in life, we can’t let the perfect be the enemy of the good. And doesn’t getting $7,500 off your next vehicle purchase sound pretty darn good?