The Inflation Reduction Act radically overhauls the tax credits available for purchasing electric vehicles (EVs) in the United States. This guide will clearly walk you through what changed, which EVs still qualify, impacts on automakers, and what it means for you.
First, let‘s quickly review the previous EV tax incentive rules to better understand this seismic policy shift…
Background on the Old Plug-In Electric Vehicle Tax Credit
From 2010 through 2022, most electric vehicles and plug-in hybrids qualified for a federal "Plug-In Electric Drive Vehicle Credit." I‘ll explain how it worked:
- The credit amount depended on battery capacity
- $2,500 minimum for ≥ 5 kWh capacity
- Plus $417 for each additional kWh up to 16 kWh
- Capped at $7,500
For example, a Toyota Prius Prime plug-in hybrid with a 8.8 kWh battery received a $4,502 tax credit.
Pretty simple so far. However, there was a big catch…
Once an automaker sold over 200,000 total EVs, credits began phasing out over 12 months for all their vehicles. This explains why today you can no longer get a credit for a Tesla or Chevrolet Bolt EV purchase.
Now let‘s analyze how impactful these credits proved before the recent changes…
Surging U.S. EV Sales Showcased Tax Credit Effectiveness
Industry data makes clear that EV tax credits powerfully stimulated demand over the last decade alongside rising model availability.
Just look at this table showing skyrocketing US EV sales growth in recent years:
| Year | Total EVs Sold | Annual Growth |
|---|---|---|
| 2016 | 159,139 | 37% |
| 2017 | 199,826 | 25% |
| 2018 | 361,307 | 81% |
| 2019 | 326,644 | -10% |
| 2020 | 296,000 | -9% |
| 2021 | 608,289 | 106% |
(Source: Statista. Note 2021 figures partly estimated due to data lag)
Despite the pandemic, a record-shattering 608,289 EVs sold in the United States last year. The 106% year-over-year surge showcases accelerating mainstream adoption.
Clearly, tax credits proved very effective stimulating consumer appetite. But change arrived in 2022…
The New Clean Vehicle Credit Explained
The recently passed Inflation Reduction Act completely overhauls the previous incentive approach starting for 2023 purchases.
Here are the key details you need to know:
- North American final assembly required
- Percent of "critical" battery minerals must come from US/allies
- Percent of battery components made/assembled domestically
- Price caps based on vehicle type
- Income caps for eligibility
These interlocking provisions aim to spur domestic EV manufacturing and supply chain resilience.
Let‘s explore what each rule means…
North American Assembly Now Mandatory
The most immediate impact was the final assembly requirement taking effect August 16th, 2022.
EVs must now complete building in North America to qualify for any tax credit at all moving forward.
This change instantly excluded many models from eligibility, including:
- Hyundai Ioniq 5
- Kia EV6
- Mazda MX-30
- Toyota bZ4X
Domestically built EVs like the Ford Mustang Mach-E and Tesla Model Y remain qualified for now due to US assembly.
But meeting upcoming requirements poses major hurdles…
Sourcing Battery Materials Gets Tricky
The Inflation Reduction Act requires escalating percentages of an EV‘s battery "critical minerals" to originate from the US or allied trading partners.
The list of covered minerals includes:
- Lithium
- Cobalt
- Nickel
- Manganese
- Graphite
Automakers must secure 40% of such minerals for the US/allies in 2023, rising steadily to 80% in 2027.
This aligns with half of the total $7,500 potential tax credit amount. So in 2025, an EV meeting the 60% target would secure a $4,500 credit.
Finding and refining enough qualifying minerals domestically and from select foreign allies in just a couple years presents severe supply chain challenges, however.
Making Battery Components in North America
The rules further require escalating levels of an EV‘s battery components to be manufactured or assembled in the United States or Canada.
The threshold starts at 50% in 2023 before topping out at 100% in 2029. This covers the other half of the full $7,500 tax credit.
Many automakers will need to significantly restructure manufacturing operations and build new domestic battery factories to meet these benchmarks over the next 6-7 years.
Let‘s look at what some leading companies are doing to address the new requirements…
EV Maker Strategies Responding to the Changes
Major electric vehicle manufacturers are swiftly revamping plans aiming to qualify models for the revised tax credits starting in 2023.
General Motors publicly shared that it‘s developing a major North American battery materials processing hub through a new joint venture. Dubbed LiNiCo, the Michigan plant intends to supply cathodes and anodes using regional mineral sourcing to meet the new rules.
Tesla is building large lithium refining operations in Texas as part of an integrated battery production strategy. The company also now sources some lithium domestically from geothermal brine operations.
Hyundai and new EV brand Ioniq just announced an $5.5 billion investment to start building EVs and batteries in Georgia. Ioniq CEO Brian Jones directly linked the plans to capturing the revised EV tax credits.
Clearly, the Inflation Reduction Act provides major incentives to restructure supply chains and boost domestic manufacturing capacity.
Now let‘s tackle some common consumer questions about how these changes impact tax credit eligibility…
Frequently Asked EV Tax Credit Questions
Confused about how the EV policy overhaul impacts your potential tax credit? Here are helpful answers to the most common questions.
What EV models still qualify for the $7,500 tax credit?
At least for 2023 purchases, models like the Ford Mustang Mach-E, Chevy Bolt EUV, Nissan Leaf Plus and Tesla Model Y meet the new North American final assembly rule and should qualify based on pricing.
Can I lock in the old EV tax credit rules with an existing reservation?
Unfortunately not in most cases. You needed a binding purchase contract including a minimum 5% non-refundable deposit established prior to August 16th, 2022.
When will no more EVs qualify for credits?
Experts forecast that by January 1, 2025, zero currently available EV models will meet the phased-in battery materials sourcing requirements. Significant supply chain changes are necessary.
How long will it take for "compliant" EV models to emerge?
Most industry watchers estimate it will require 4+ years for reconfigured supply chains and purpose-built EVs matching the Inflation Reduction Act rules to reach market. So maybe not until 2026 or 2027.
Can I get a tax credit on a used EV purchase?
Yes! The revised program introduces used EV credits for the first time. You can get up to a $4,000 credit on the purchase of select used EVs $25,000 or less in price.
Reaching the full $7,500 tax credit level will clearly take most manufacturers significant time and investment in transformed North American operations.
More Expensive EVs May Result in Near Term
The Inflation Reduction Act undoubtedly will accelerate domestic manufacturing investments and jobs over time. That supports its secondary intention around stimulating the economy.
But in the next couple years, the drastic supply chain changes automakers must undertake could also make developing and producing electric vehicles more expensive.
Many companies may hike EV prices as they build new battery factories and secure costlier North American minerals until economies of scale improve.
So expect potential continued constraints around affordable EV model availability even as demands grows thanks to policies like California‘s gas vehicle prohibition by 2035. Tax credit qualification challenges could also slow adoption until more accessible compliant options arrive.
Weighing the overall near and long term trade-offs requires intricate analysis. Environmental and energy security benefits from increased domestic EV production may outweigh temporary setbacks to uptake velocity.
Final Thoughts on the Impact for You
If you claimed or hoped to claim an EV tax credit in 2023, unfortunately most options vanished overnight due to the August manufacturing location changes. Only North American-built models now qualify.
Tough critical mineral and battery component sourcing rules then phase in over the next 6 model years. So access to affordable qualifying EVs likely won‘t improve until perhaps 2026 or later.
Planning to purchase an electric vehicle in the next few years therefore gets trickier. Your selection set will keep shrinking in the near term. Costs may rise as well for qualifying models as automakers reshore manufacturing.
I advise tallying up total ownership costs over 6-8 years when considering current or upcoming EVs. The tax credit makes a huge difference in reaching cost parity with gas vehicle options.
Monitor brand announcements about how they‘ll capture reinstated federal credits in future model years. Those plans can help guide your timing and purchase priorities.
I hope this comprehensive guide to the seismic changes in electric vehicle tax policy proves helpful. Please reach out with any other questions!
