The US government might have just increased the cost of your next EV

New rules for tax credits on electric vehicles are good news for some, bad news for others

All About Electric Vehicles

ORLANDO, Fla. – Are you in the market for a new electric vehicle? They’re quick, they’re green and they are generally lower in cost to maintain than their ICE (internal combustion engine) counterparts. But because EVs (and PHEVs – plug-in electric vehicles) are relatively new technology and very popular (see gas prices), most electric cars, crossovers, SUVs and trucks are not cheap.

To take some of the sting away from the hefty purchase price of a new electric vehicle (and to promote and speed along the adoption of emerging battery technology), the U.S. government established tax credit incentives for EVs and PHEVs as part of the Energy Improvement and Extension Act of 2008. The “Clean Vehicle Credits” went into effect on January 1, 2010.

In general, here’s how it works: If you take delivery of a new EV or PHEV and the manufacturer of that vehicle has sold less than 200,000 of them, then you qualify for a credit of up to $7,500 on your taxes (assuming you had at least $7,500 in federal taxes for the year). After a manufacturer has sold 200,000 qualified electric vehicles, the tax credit goes down by half to $3,750. Six months later, the credit is halved again to $1,875. One year after the first reduction, tax credits for vehicles from that manufacturer are completely phased out.

Tax credits start at $2,917 for a vehicle with a 5kWh battery pack (a small battery that you’ll find on a plug-in), and go up by another $417 for each kilowatt hour of battery capacity. The credits top out at the aforementioned $7,500. As an example, a Ford Mustang Mach-E (EV) will have a $7,500 tax credit (standard battery packs are 70 kWh), but a Subaru Crosstrek Hybrid (PHEV) only has a $4,502 tax credit (standard battery packs are 8.8 kWh).

[NOTE: Apologies for not warming readers in advance that there would be math involved in this article.]

According to the Department of Energy’s list for Federal Tax Credits for New All-Electric and Plug-in Hybrid Vehicles, Tesla tax credits expired on December 31, 2019. GM’s tax credits (Chevrolet and Cadillac) expired on March 31, 2020. Both Toyota and Lexus tax credits are scheduled to sunset on September 30, 2023.

And by the way, Toyota only recently introduced their first all-electric vehicle in years, the 2023 bZ4X (bZ stands for “beyond zero” (for emissions), “4″ is the vehicle category, and “X” stands for crossover). The company used most of its battery technology and resources on hybrids (which don’t qualify for federal tax credits because their battery capacity is under 5 kWh) and plug-ins (which can qualify for federal tax credits because their battery capacity is over 5 kWh). Previously, Toyota brought only one fully electric model to market (the 2012-2014 RAV4 EV).

So that’s how the tax-credit for electric vehicles incentives work -- until now.

On August 16th, President Joe Biden signed the Inflation Reduction Act of 2022, legislation designed to bring economic relief to consumers.

For anyone looking for an electric vehicle, the new statute restores the $7,500 tax rebate for manufacturers that had sold more than 200,000 EVs or PHEVs. Furthermore, used EVs and PHEVs will soon qualify for up to $4,000 in tax credits.

This is great news for the companies that had used up all their tax credits (we’re looking at you GM and Tesla). In effect, those two manufacturers get to pass along up to $7,500 in price breaks to most of their EV/PHEV customers without essentially lifting a finger.

But oh, did we forget Toyota?

Nope, because under the new rules set to go into effect in 2024, right now, EVs and PHEVs from Toyota (the RAV4 Prime, Prius Prime, and bZ4X) don’t qualify. Neither will a lot of other popular vehicles like Kia’s EV6, Niro and Sorento Plug-In or Hyundai’s Ioniq 5, Kona, Santa Fe Plug-In, Sonata Plug-In and Tucson PHEV. Why? As part of the Inflation Relief Act, language was slipped in to exempt EVs and PHEVs that are not assembled in North America.

Where someone giveth, someone also taketh away and in this case, that someone would by West Virginia Senator Joe Manchin (D).

A big part of getting the bill through the Senate were secret negotiations between Manchin and Senate Majority Leader Chuck Schumer. In this case, Manchin’s wants and needs went to the core of protecting his West Virginia constituents, mainly putting language in place to rally against China’s dominance in supplying battery components for electric vehicles.

Manchin pushed for mandates that among other things, require 40% of the battery components (minerals such as graphite, lithium, nickel cobalt, and manganese) be sourced from the U.S. or another free trade agreement country. Furthermore, the Inflation Reduction Act says those components cannot come from a “foreign entity of concern,” including China and Russia. And that 40% rises every year.

While these new requirements are a push for less reliance on the Chinese for electric vehicle power (China supplies about 76% of the lithium-ion batteries in the world’s electric vehicles; the U.S. supplies about 8%), all of this could have a very negative effect on the eligibility of tax credits for American buyers going forward.

Aside from Toyota, Hyundai and Kia being the big losers under the new rules (because their EV and PHEVs aren’t assembled in North America), some other well-known manufacturers are also unhappy and could be left out in the cold.

Nissan’s new Ariya all-electric SUV will be excluded because it is being built in Japan, but the Leaf (built in Smyrna, Tennessee) will be safe (if the Leaf is still in existence going forward). Subaru will miss out (the Crosstrek Hybrid and Solterra are built in Japan) as will Porsche (all Porsches are built in Germany). Audi is a winner and loser (mostly loser) as their EVs and PHEVs are built in Germany (except for all of their Q5s, which are built in Mexico).

Same news for BMW: their iX and i4 (EVs) are also built in Germany, but the X5 is built in Spartanburg, South Carolina (and all 3-Series are built in Mexico). Volkswagen is a winner; as of last month, they started building their only EV, the new ID.4, in Chattanooga, Tennessee (previous First Edition ID.4s were made in Germany). Remember, however, all of these foreign nameplates will only get their tax credits going forward if they are not only built in North America, but also meet the battery components requirements as well.

Many argue that less choices for tax credits for electric vehicles (because they’re not built in North America) exudes nationalism and an isolationism approach that is unfriendly to consumers and ultimately prolongs U.S. reliance on fossil fuels.

In addition to the North American assembly requirements, there are some other new rules going forward in 2024:

  • EV or PHEV sedans can’t cost more than $55,000.
  • EV or PHEV SUVs, pickups, and vans can’t cost more than $80,000.
  • Income for people looking to cash in on the tax credits would also be capped: $150k for single filers, $225,000 for head of households, and $300k for joint filers.
  • The tax credits will be in place through 2032.
  • The new legislation also includes a so called “transition rule.” In a nutshell, if a customer has a written, binding contract on an electric vehicle BEFORE President Biden signs the bill, the current tax credit payout is in effect no matter when the vehicle is delivered. Who’s liking this loophole? Just about all of the foreign automakers who will be left out in the cold in the future and Rivian, whose vehicles have prices that may exceed the new caps.
  • More information on used electric vehicles: the tax credit is $4,000 OR 30% of the price of the vehicle, whichever is less. Used vehicles must be at least two years old and cost $25,000 or less.
  • Both new and used hydrogen fuel cell vehicles also qualify, but we pretty much don’t have them in Florida because the hydrogen fueling infrastructure limits just about all of them to California.
  • Battery capacity on the EV or PHEV must be at least 7 kWh (up from 5 kWh).
  • Clean Vehicle Credits can be directly transferred to the dealer prior to the purchase of the EV or PHEV. This may be the most overlooked part of the Inflation Reduction Act when it comes to EVs and PHEVs. Going forward, customers would have the option of transferring their tax credit directly to the dealership who would then take the same amount off the purchase price of the electric vehicle or give the consumer a cash rebate. Bottomline: no waiting around until each April to claim the tax credit.

Who wins and who loses?

For the moment, everyone loses as there are barely any EVs and PHEVs that are built in North America that also have 40% of their battery components manufactured in North America as well.

According to the Alliance for Automotive Innovation, of the 72 new EV and PHEV vehicles available in the U.S. today, “Seventy percent of those EVs would immediately become ineligible when the bill passes and none would qualify for the full credit when additional sourcing requirements go into effect.” In opposition to Manchin’s push for more domestic sourcing of battery components, the group instead is calling for a more gradual adoption of the new requirements. John Bozzella, president and CEO of the Alliance for Automotive Innovation suggests the U.S. not just limit battery sourcing to free trade agreement countries, but to include NATO countries as well.

If the battery component requirements can be met, the big winners will be General Motors and Tesla who will be excited to get their tax credit eligibility reinstated. Ford and Stellantis (Chrysler, Fiat, Jeep, Peugeot, and RAM) are breathing a sigh of relief because even though they were both late to the PHEV and EV game, that lateness may payoff in the short-term of the next two years (they are both still under their respective 200k caps) and the fact they won’t have to sweat about losing tax credit incentives for another eight years after that.

As for all manufacturers with electric vehicles built outside of North America, it will be interesting to see if those with factories in Canada, Mexico, or the U.S. start to shift production (not something easily done on a short timeframe) or if heavy lobbying will turn into exemptions or waivers. All in all, the next few years will be interesting to watch as the rules shift to benefit some and hamper others.

Where does this leave consumers?

If you’re in the market for an EV or PHEV right now and that model still qualifies for a tax credit, you may want to consider starting that purchasing process sooner rather than later. This would especially go for vehicles that qualify now but won’t qualify later. If a vehicle like that is months (or years) away from being delivered, because of the transition rule, if your mind is made up, pull the trigger on the deal. But, if you wait a bit, you’ll get a much better financial deal on a used electric vehicle or a new Tesla, Cadillac, or Chevy (like Chevy’s all- new, all-electric Blazer) or some (but not all) new electric vehicles that will be introduced over the coming years.

Hang in there and keep this in mind: “To lose patience is to lose the battle,” so said Mahatma Gandhi.

About the Author:

Donovan is WKMG-TV's executive producer of digital enterprise