New EV Plan: Expand Credits But Cut Eligibility

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  • Price and income caps eliminate top luxury EVs and wealthiest buyers
  • Fuel-Cell Electrics Qualify Once More
  • Content and assembly rules could limit vehicle eligibility
  • Designed to promote North American manufacturing and sourcing
EV Credits
GM’s state-of-the-art, all-EV Factory Zero is the kind of manufacturing encouraged by the EV tax credits portion of the new “Inflation reduction Act” climate and energy spending legislation. GM also would regain tax credit eligibility for its EVs under the proposed new rules. But most of the GMC Hummer EVs being made at the new plant – and many of their buyers – wouldn’t qualify for the credit under the plan’s price and income caps . General Motors photo

It looks as though federal EV tax credits may have a new life after all. And the plan, outlined in new climate and energy legislation hashed out by Senate Democrats this week, is good news for most EV shoppers, including – for the first time – those looking at used EVs.

It’s also has some good news for automakers, especially Tesla, General Motors and Toyota, because it eliminates the present plan’s sales cap for ending tax credit eligibility.

But it also places some tough restrictions on manufacturing and battery components that could make some companies and some otherwise qualified vehicle ineligible for the credits. 

[A 7-minute read.]

If the new measure, part of the proposed Inflation Reduction Act of 2022, makes it through votes in the Senate and House – which could happen by mid- August – all three would regain their lost eligibility and buyers of their qualified clean cars and trucks could realize big savings.  It would be in effect until the end of 2032.

The Conditions

The plan requires that qualified vehicles be “assembled” in North America, eliminating models put together outside of the U.S. Canada or Mexico. It drops a “union made” requirement previously sought by the Biden Administration.

It also would require auto companies to use battery minerals and components produced or assembled in North America or one of the 20 nations with which the U.S. has free trade agreements. That list of free-trade partners doesn’t include major battery mineral suppliers China, Chile. Congo or Russia, or major battery producing nations Japan and South Korea.

The requirements are intended to push development of U.S.-based battery production and battery materials mining and to force foreign automakers to move more vehicle production to North America.

Consumer Gold

For consumers, the new measure is replete with new advantages including the possibility of a point-of-sale application of the credit.

It would for the first time extend a federal tax credit to buyers of used “clean vehicles,” defined as EVs, plug-in hybrids and fuel-cell electric cars – a maximum of $4,000 – while keeping intact the present $7,500 maximum credit for new qualified clean vehicles.

It sets up income and purchase -price qualifiers that would deny tax credit eligibility to the wealthiest taxpayers and the expensive clean vehicle models they tend to favor.

It also would allow – but not require –  auto dealers to apply a buyer’s tax credit against the purchase price – making it for the first time a so-called point-of-sale credit. Presently, the credit cannot be claimed until the buyer files an income tax return for the year in which the purchase was made – and the credit cannot exceed the buyer’s tax liability for the year.

That provision “is huge” for consumers and for continued EV development and sales growth, said Don Anair, head of the Union of Concerned Scientists’ clean transportation program.

Exact language of the point-of-sale feature hasn’t been worked out but it likely would set up a system in which dealers could voluntarily agree to accept an assignment a buyer’s tax credit. It is unclear whether the dealer would then get immediate cash from the IRS or would have to wait until tax time to claim it.

Purchase and Income Caps

The measure sets limits on buyer income and qualifying vehicle prices in an attempt to stop what some critics of the present EV tax credit program see as incentives being wasted on wealthy buyers who don’t need them.

To win over those critics, the new plan sets an annual taxable income limit of $150,000 for individuals and $300,000 for joint filers purchasing new clean vehicles. For used clean vehicle buyers the cap is $75,000 for individuals and $150,000 for joint filers.

Prices of qualified new vehicles are based on the MSRP and capped at $80,000 for pickups, vans and SUVs most crossovers are considered SUVs) and $55,000 for cars.

The cap for used models is $25,000 and the tax credit cannot exceed 30% of the vehicle price, up to the $4,000 maximum credit.

Used vehicles also must be at least two years old at the time of the sale, must be purchased by an individual and from a licensed car dealer.

The price caps likely would eliminate most Tesla models, Rivian trucks and SUVs, the new Hummer EV and most luxury EVs.

Fuel-Cells Return

The measure also includes fuel-cell electric vehicles, or FCEVs,  in the definition of the “clean vehicles” that would qualify for the credit. Toyota and Hyundai both make limited availability fuel-cell models with pricing that would qualify for the credit.

FCEVs used to have an $8,000 federal tax credit, but hydrogen hasn’t been considered a viable passenger vehicle fuel by many and the credit expired and was reinstated several times before finally being eliminated at the end of expired at the end of 2021.

It was reinstated in the new proposal because Sen. Joe Manchin, a West Virginia Democrat who had been single-handedly holding up the climate and energy package, agreed to push it forward (his is the 50th vote Democrats need for passage in the Senate) only if development of hydrogen and other alternative fuels, as well as cleaner fossil fuels, was included in some of the spending.

Two Tiers

The measure would eliminate the present formula that uses battery size as the basis for determining which vehicles qualify and how much of a credit each gets. 

Presently, all EVs qualify for the full $7,500 credit but most plug-in hybrids get only a portion – which changes from model to model – because their batteries are much smaller.

Under the new plan, the credit for new clean vehicles is divided into two parts:

  • $3,750 for those with at least 40% of their battery-critical minerals (such as lithium and cobalt) to be from the U.S. or from countries that have free-trade agreements with the U.S.  The required percentage would increase by 10 points annually until hitting 80% in 2027.
  • $3,750 for those with at least 50% of their other battery components from the U.S.  of the free-trade nations. The requirement would increase by 10 points annually until hitting 100% in 2029.

Which Automakers Are Impacted?

To date, General Motors, Ford, Nissan, Stellantis, Tesla, Rivian, Lucid Motors and Volkswagen assemble some or all of their EVs in North America.

BMW, Hyundai, Kia, Honda, Mercedes-Benz, Volvo and Polestar all are planning or are about to open EV manufacturing plants in the U.S.  but may not be ready in time if the measure is approved and takes effect Jan. 1.

How smaller foreign automakers with no North American manufacturing presence can handle the North American assembly issue is uncertain.

One way carmakers could avoid the expense of full manufacturing plants is to ship EV “kits” containing all the relevant components to a North American site for final assembly into completed vehicles.

Let the Lobbying Begin

The immediate impact of the proposal on Asian and European automakers’ continued eligibility for clean vehicle rebates for all of the EV, plug-in hybrid and fuel-cell models they now sell in the U.S. isn’t clear.

There’s still a lot of fine- tuning to be done and after it clears the Senate, now expected to pass it as early as the first week in August on a 50-50 vote with the Vice President breaking the tie in favor of passage – the measure still is subject to revisions in the House. There it could be subject to additional modification which could require the Senate’s consent. Too many changes could jeopardize Manchin’s support and the chance of a House-amended measure surviving.

Why Should We Care?

By establishing income and price caps, the proposed new EV credits plan “is a huge improvement over the existing program, which has so many flaws,” said Dan Sperling, a US Davis environmental science and engineering professor and head of the university’s Institute of Transportation Studies.  

The addition of a credit for used EVs finally opens EV access to lower-income shoppers, he said, and the point-o-sale provision, if it is adopted by enough dealers, will make new and used EV purchases easier and more affordable, he said.

On a broader scale, adoption of EVs and other types of low- and zero emissions vehicles is critical in any effort to reduce greenhouse gas emissions and their impact of climate conditions, Sperling said.

Financial incentives are critical to help speed up adoption of clean vehicles and “we need to do it as quickly as we can,’ said Anair, of the Union of Concerned Sciences. The transportation sector is the single largest producer of climate-harming emissions, he said, and cars and light trucks are the biggest contributors in the sector because of their huge numbers.

“The next 10 years are absolutely critical in addressing this source of pollution, and if this measure is approved it will set us up for success,” Anair said.