DETROIT (AP) — A tax credit of up to $7,500 could be used to cover the cost of an electric vehicle under the Inflation Reduction Act, which is now in the process of final approval in Congress.
But the auto industry warns that the vast majority of EV purchases will not qualify for such a large tax credit.
This is mainly due to the bill’s requirement that to qualify for the credit, an electric vehicle must contain a battery manufactured in North America with minerals mined or recycled on the continent.
And those rules are getting tighter over time — to the point where in a few years it’s possible no electric car will qualify for the tax credit, says John Bozella, CEO of the Alliance for Automotive Innovation, a key trade group in the industry. Currently, the alliance estimates that about 50 of the 72 electric, hydrogen or plug-in hybrid models sold in the United States will not meet the requirements.
“The $7,500 credit may exist on paper,” Bozella said in a statement, “but no vehicle will be eligible for this purchase for the next several years.”
The idea behind the requirement is to encourage local manufacturing and extraction, build a stable battery supply chain in North America, and reduce the industry’s reliance on overseas supply chains that can be subject to disruptions.
The production of lithium and other minerals that are used to make EV batteries is now dominated by China. And the world’s leading producer of cobalt, another component of electric car batteries, is the Democratic Republic of Congo.
Although electric vehicles are part of a global effort to reduce greenhouse gas emissions, they require metallic elements known as rare earth metals found in places like Myanmar, where an Associated Press investigation found that the push for green energy has led to destruction of the environment.
Under the $740 billion economic package that passed the Senate over the weekend and is up for approval in the House, the tax credits will take effect next year. For an EV buyer to qualify for the full credit, 40% of the metals used in the vehicle’s battery must come from North America. By 2027, this required threshold will reach 80%.
If the metals requirement is not met, the automaker and its buyers will be entitled to half of the tax credit, $3,750.
A separate rule requires that half the value of batteries be manufactured or assembled in North America. If not, the rest of the tax credit will be lost. These requirements also become more stringent each year, eventually reaching 100% in 2029. Yet another rule would require that the EV itself be manufactured in North America, thereby excluding from the tax credit any vehicles manufactured abroad.
Automakers typically don’t release where their components come from or how much they cost. But some versions of the Tesla Model Y SUV and Model 3, the Chevrolet Bolt car and SUV, and the Ford Mustang Mach E are likely to be eligible for at least some of the credit. All of these vehicles are assembled in North America.
The tax credit will only be available to couples with incomes of $300,000 or less or single people with incomes of $150,000 or less. And any trucks or SUVs with sticker prices over $80,000 or cars over $55,000 will not be eligible.
There’s also a new $4,000 credit for buyers of used electric vehicles, a provision that could help modest-income households switch to electric.
The industry says the North American battery supply chain is currently too small to meet the demands for battery components. The measure is proposed to expand the list of countries whose battery materials would be eligible for the tax credit to include nations that maintain defense agreements with the United States, including NATO members.
One component of the bill would require that after 2024, no vehicle would be eligible for the tax credit if its battery components came from China. Most vehicles now have some parts originating in China, the alliance said.
Sen. Debbie Stabenow, Democrat of Michigan and a leading ally of Detroit automakers, complained that Sen. Joe Manchin of West Virginia, a critical Democratic vote, has opposed any tax credits for electric car purchases.
“I went around with Senator Manchin, who frankly did not support any credit, so this is a compromise,” Stabenow told reporters Monday. “We will work on it and make it as good as possible for our car manufacturers.”
Manchin, a longtime Democrat who negotiated the terms of the deal with Senate Majority Leader Chuck Schumer, has blocked previous proposals on climate and social spending.
Manchin’s office declined to comment. He told reporters last week that he wants automakers to “get aggressive and make sure that we mine in North America, we process in North America, and we draw a line against China. I don’t believe we should be building a mode of transportation on the backs of foreign supply chains. Will not do it.”
Stabenow argues that the bill was written by people who don’t understand that manufacturers can’t just flip a switch and create a North American supply chain, even though they are working on it. Many automakers, including General Motors, Ford, Stellantis, Toyota and Hyundai-Kia, have announced plans to build EV battery plants in the United States.
Katie Sweeney, executive vice president of the National Mining Association, said industry leaders “like the requirement that battery minerals be sourced close to home and not from our geopolitical rivals.”
“Doing this,” she said, “directly supports high-paying jobs here in the United States … secures our supply chain and really increases our global competitiveness.”
Stabenow said he remains hopeful that the Biden administration can offer tax credits next year while it works on detailed rules for the battery requirements.
“We will continue to work with the automakers and the administration to inject as much common sense into the regulations as possible,” the senator said.
Messages were left Monday seeking comment from the White House and the Treasury Department, which will administer the loans.
Stabenow says she’s pleased the measure will restore tax credits for General Motors, Tesla and Toyota, all of which were capped under a previous bill and can no longer offer them. Ford, too, she said, is closing in on the EV cap.
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AP writers Matthew Daly and Fatima Hussain contributed to this report from Washington.
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