The EV Tax Credit Dilemma

If you're planning on getting an EV and are banking on a big tax kickback, you might want to do it immediately. Or hold off.

Published on:

April 6, 2023

Tech

The EV Tax Credit Dilemma

Having trouble keeping up with the world of electric vehicle (EV) tax credits? Join the club.

Some background:

The existing tax credit system for EV purchases was reworked through the passage of the IRA in 2022 – a big win for everyone looking to get access to low-emissions transportation. Upon passage, it was understood that additional guidelines would be phased in gradually over the course of 2023 while the components relating to batteries and critical minerals were finalized. So, on March 31, the US Treasury Department and the IRS released new guidance for the EV tax credit provisions of the 2022 Inflation Reduction Act (IRA). Despite their intentions to spur domestic mineral production, the new guidelines (more info below) are poised to potentially make it more challenging for new EVs to qualify for the full federal tax credit. The result is increased barriers for the average American seeking to swap their conventional car for an EV, or at least making the process more difficult and less enticing.

Going halfsies:

One update states that in order to qualify for up to $3,750 of the tax credit (half of the original $7,500 federal tax credit offered to individuals purchasing a new EV), 50% of the vehicle’s battery must be assembled or manufactured in the US. To qualify for the other $3,750, 40% of the critical minerals found in its battery are required to be sourced from the US or the other 20 countries involved in the US free trade agreements. This amount will increase to 80% by 2027.

The mineral mess:

The new standards on sourcing battery materials and critical minerals pose challenges, since the US lacks adequate mines and battery plants to produce the quantity of minerals needed. In fact, according to E&E News, “roughly 117 lithium, cobalt and nickel mines would have to open to feed the EV market by 2030 (Holzman, 2022).” Not only is sourcing materials domestically difficult, but accounting for each step in the process is near impossible. As stated by NPR’s Weekend Edition, “If you had a bag of dried rice and I asked you, did 50% of that rice come from the United States or not? - like, you might be confused by why I was asking that question, but you could figure out how to answer it, right? What if you had a burrito and I asked you… is half of that burrito from the United States? - you would have a lot of follow up questions about, like, how you consider where the beans were grown...Versus where they were boiled. And then you have the salsa. That has a lot of different ingredients. Every ingredient has its own pathway. So even figuring out how you do the math is hard.”

The outcomes:

Frankly, no one knows. Will this really spur domestic production? Will this decrease peoples’ willingness to purchase an EV? Will manufacturers come up with a clear way to define their mineral mix?

Only time will tell. And the debates on these tax credits are likely long from over.

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To recap the provisions enacted after January 2023, check out the diagram below, courtesy of the Bipartisan Policy Center.