New Rules for EV Tax Credit Make Most Vehicles Ineligible

The US Treasury Department has issued new guidance for the EV tax credit that will seriously curtail how many vehicles now qualify for the tax break, worth up to $7,500.

The credit was revamped by the Inflation Reduction Act of 2022, which added income caps, price limits and other stipulations. Most changes took effect in January, but final details about battery components and "critical minerals" were still being nailed down when President Joe Biden signed the bill in August.

On March 31, the Treasury Department announced that 50% of a vehicle's battery must be assembled or manufactured in the US for it to qualify for up to $3,750 of the credit. That percentage ratchets up each year until it hits 100% in 2029. 

For a vehicle to qualify for the other $3,750 of the credit, 40%of the critical minerals in its battery -- like graphite, lithium and cobalt -- must be sourced from the US or one of the 20 countries the US has a free trade agreement with.

That amount will increase until 2027, when it maxes out at 80%. 

Chinese companies currently manufacture 56% of the EV batteries in the market. That puts the US at a competitive disadvantage and, according to the Biden administration, fuels geopolitical instability.

"The adoption of clean vehicles is central to reducing emissions in transportation while protecting Americans from the kind of spikes in gas prices that we saw at the outset of [Russian President Vladimir] Putin's brutalization of Ukraine," Lily Batchelder, the Treasury's assistant secretary for tax policy, told reporters on March 23. "However, we can't trade dependence on foreign oil for dependence on foreign batteries, and our forthcoming guidance will strengthen our supply chains."

Starting next year, vehicles that contain battery parts from "a foreign entity of concern" -- a classification that includes China, Russia, Iran and North Korea -- will be unable to claim any of the credit. 

For critical minerals, the cutoff is 2025.

The new guidelines take effect on April 18, 2023, when the current tax season ends. The Treasury Department has yet to provide an updated list of approved EVs, but GM said Friday that at least three of its cars -- the Cadillac Lyriq and the new Chevrolet Equinox EV SUV and Blazer EV SUV -- already qualify for the full $7,500 credit.

Still, the auto industry has warned that only a fraction of the 91 electric vehicles on the US market today qualify for the full credit, and many won't be eligible for any tax break at all.

"This latest turn will further reduce the number of eligible EVs," John Bozzella, CEO of the trade organization Alliance of Automotive Innovation, wrote in a blog post on Friday. "In fact, this period may go down as the highwater mark for EV tax credit eligibility since the IRA passed last year."

West Virginia Sen. Joe Manchin had pushed for the strict sourcing rules, even going so far as to threaten legislation to block the credit without them.  

Automakers and car dealers "have to understand that is an energy security bill," Manchin, a Democrat, said in January, Roll Call reported. "It was never designed to be just a climate bill, which is the way it's being promoted."

Kelley Blue Book Executive Editor Brian Moody said the new guidance may temporarily limit how many models are approved, but "at the core, the intentions are in the right place."

"The policy is designed to get more EVs -- and the things that power them -- made in America," Moody told CNET. "With more jobs for Americans and fewer for our adversaries."

Foreign carmakers have anticipated the move, he added, and are broadening their US operations.

"It's already happening," Moody told CNET. "Hyundai is building a $5.5 billion plant near Savannah, Georgia, that will include both an assembly plant and a battery factory." 

Expected to produce 300,000 Hyundai, Genesis and Kia EVs a year starting in 2025, Metaplant America will be the largest economic development project in Georgia's history and a critical part of America's supply chain for batteries and other EV components.