Starting Tuesday, a mere 14 out of the 91 electric car and truck models accessible in America will satisfy the criteria for federal tax breaks that encourage customers to make the shift to EVs. The Treasury Department finally unveiled a highly anticipated catalogue on Monday, implementing fresh regulations outlined by President Biden’s administration on March 31. This list is being celebrated as a victory for American automakers like Stellantis, General Motors, Ford, and Tesla. However, European and Asian companies such as Nissan, Volkswagen, BMW and Volvo will no longer be eligible for these tax credits.
Under the tightened restrictions, EVs and plug-in hybrid vehicles can qualify for the full tax credit of $7,500 only if they are made in the U.S. and if most of their batteries and critical minerals come from the United States or its closest trading partners. The aim of these restrictions is to promote job creation and the development of a clean-energy industry within the United States, aligning with the Democrats’ climate law passed last year. However, in the short term, this will limit the options for consumers looking for more affordable EVs with tax breaks, and may also create tensions with European governments whose automakers did not make the cut.
As of Monday, the Treasury published its guidance in the Federal Register, and the list of qualifying vehicles was posted on both the IRS’s website and the Department of Energy’s fueleconomy.gov website. Under penalty of perjury, automakers must submit a list of vehicles that qualify based on federal guidance.
In August, Congress passed the Inflation Reduction Act, which imposed domestic-sourcing requirements. The new list is a “clear and workable” interpretation, according to an anonymous administration official. Based on the official’s estimates, nearly 60 percent of electric vehicle sales during the first quarter of this year would have met the new requirements.
These restrictions are aimed at preventing China, which currently dominates the global production of electric vehicle batteries and minerals, from gaining control over the growing EV market. However, the limits may ease in the coming years as foreign automakers such as Hyundai and Nissan establish factories in the U.S. to meet the new requirements. New compliant models are expected to come online in the coming months and years, and companies are rushing to build battery and EV facilities in the United States to comply with the rules. The U.S. and the European Union are also engaged in trade talks to potentially allow minerals from EU countries to count toward the domestic-sourcing rules. Nevertheless, the rules are expected to tighten each year, potentially excluding some vehicles from eligibility for the tax credit.
Just a few days ago, automakers who invested over $100 billion in electric vehicles were hit by a significant reduction in the available tax credit, a setback despite the generally higher sticker prices of EVs compared to gasoline-powered cars. Furthermore, it poses a temporary obstacle to President Joe Biden’s goal of transitioning from fossil fuels to electric power.
With an aim of accounting for two-thirds of new car and light truck sales by 2032, the EPA recently proposed a new fuel economy mandate that aims to significantly increase electric vehicle production. Due to the limited number of electric vehicles currently eligible for incentives, it is unclear if this goal can be achieved.
According to the new Treasury list, only seven models will qualify for the full tax credit of $7,500, and six models will qualify for a half-credit of $3,750, depending on whether their battery minerals, battery components, or both meet the domestic content rules. Tesla’s Model 3 falls in between the two categories, with the rear-wheel-drive version starting at $41,990 eligible for only half the credit, and the more expensive all-wheel-drive version starting at $47,490 eligible for the full credit. Other manufacturers such as Volkswagen, Ford and Honda are also offering their electric vehicles with varying levels of domestic content in order to qualify for either a half or full tax credit.
Although these credits may be small when compared to other incentives like renewable energy tax credits or fuel economy rebates, they can still provide some relief against rising gas prices and help make electric vehicle ownership more affordable for consumers.