Many electric vehicles to lose big tax credit under proposed new rules

FILE - A Tesla electric car is plugged into a recharging terminal on April 27, 2022 in South Burlington, Vermont. (Photo by Robert Nickelsberg/Getty Images)

Fewer new electric vehicles will qualify for a full $7,500 federal tax credit later this year, and many will get only half that, under rules proposed Friday by the U.S. Treasury Department.

The rules, required under last year's Inflation Reduction Act, are likely to slow consumer acceptance of electric vehicles and could delay President Joe Biden's ambitious goal that half of new passenger vehicles sold in the U.S. run on electricity by 2030.

The new rules take effect April 18 and are aimed at reducing U.S. dependence on China and other countries for battery supply chains for electric vehicles.

Electric vehicles now cost an average of more than $58,000, according to Kelley Blue Book, a price that’s beyond the reach of many U.S. households. The tax credits are designed to bring prices down and attract more buyers. But $3,750, half the full credit, may not be enough to entice them away from less-costly gasoline-powered vehicles.

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Biden administration officials concede that fewer electric vehicles will be eligible for tax credits in the short term because of the rules, which set standards for where EV battery parts and minerals come from. But they say that, over time, more EVs and parts will be manufactured in the U.S., creating a domestic supply chain and more jobs. The credits and other measures also will end U.S. dependence on China for parts and minerals, officials contend.

The new rules will help consumers save money on EVs "and hundreds of dollars per year on gas, while creating American manufacturing jobs and strengthening our energy and national security," Treasury Secretary Janet Yellen said Friday.

But Sen. Joe Manchin, the West Virginia Democrat who negotiated terms in the new law that require battery sourcing in North America, said the guidance released by the Treasury Department "completely ignores the intent of the Inflation Reduction Act.''

Manchin called it "horrific" that the Biden administration "continues to ignore the purpose of the law, which is to bring manufacturing back to America and ensure we have reliable and secure supply chains.''

Referring to the proposal's 60-day comment period, Manchin said, "My comment is simple: Stop this now. Just follow the law."

Drivers looking to buy an EV must move quickly to get the full $7,500 tax credit. The Internal Revenue Service lists more than three dozen electric or plug-in hybrid passenger vehicles made in North America that now are eligible. But some won't qualify or will get only half once the new Treasury Department rules take effect in less than three weeks.

A Treasury official wouldn’t give an estimate of how many EVs would be eligible under the new rules. The department plans to publish a list on April 18, the official said.

Automakers have to certify that their vehicles meet requirements for full or partial tax credits.

John Bozzella, CEO of the Alliance for Automotive Innovation, an industry trade group, said only a few of the 91 EV models now for sale in the U.S. likely will get the full credit, although some will qualify for half.

"We now know the EV tax credit playing field for the next year or so. March 2023 was as good as it gets,'' Bozzella said.

The big issue is new rules limiting the percentage of battery parts and minerals that come from countries that don't have free trade or mineral agreements with the United States.

This year, at least 40% of the value of battery minerals must be mined, processed or recycled in the U.S. or countries with which it has trade deals. That rises 10% every year until it hits 80% after 2026.

Also, at least 50% of the value of battery parts must be manufactured or assembled in North America this year. That requirement rises to 60% next year and in 2025 and jumps 10% each year until it hits 100% after 2028.

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Some automakers can meet the battery parts sourcing requirements, but few will be able to comply with the mineral provisions, said Guidehouse Research e-Mobility analyst Sam Abuelsamid. Much of the lithium used in EV batteries now comes from China.

"The minerals requirement is going to be the really challenging one," Abuelsamid said. "Setting up refining for lithium in other locations is probably going to take the longest."

General Motors, for instance, says its EVs will only be eligible for $3,750 once the rules are effective. The company is building a U.S. supply chain, and its vehicles should get the full credit by mid-decade, its chief financial officer has said.

The Inflation Reduction Act also places price limits on new electric vehicles, $55,000 for cars and $80,000 for pickups, vans and SUVs. There also are income limits aimed to stop wealthier people from getting credits. Buyers cannot have an adjusted gross annual income above $150,000 if single, $300,000 if filing jointly and $225,000 if head of a household.

In addition, starting in 2025, battery minerals cannot come from a "foreign entity of concern," mainly China and Russia. Battery parts cannot be sourced in those countries starting in 2024; minerals can't come from those countries in 2025.

The Biden administration said rules governing that requirement are in the works.

The new rules define principles that countries must meet to be eligible. Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, Singapore and Japan are on the list. Japan this week reached a deal with the U.S. on trading in critical minerals for EV batteries.

Even though the proposed rules are effective April 18, the Biden administration is taking public comments, and the rules can be modified later, including the addition of countries that negotiate trade agreements with the U.S.

The government says companies have announced at least $45 billion in U.S. investments since the Inflation Reduction Act was passed.

Senate Finance Committee Chairman Ron Wyden, D-Oregon, said he has concerns about the battery material provisions. "Free trade agreements cannot be unilaterally decided by the executive branch," he said during a recent hearing. "They require consultation and consent from Congress. That includes any agreements on critical minerals."

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Krisher reported from Detroit.