Car buyers looking to get a tax break on a new electric vehicle will now confront an even narrower set of options and have to buy from a U.S. brand.
The U.S. Treasury Department released its latest list Monday, detailing which plug-in models qualify for a federal tax credit that has been popular with consumers under new and much stricter requirements adopted by the Inflation Reduction Act.
The latest changes, which set new criteria for the battery components and are intended to coax auto makers to build more domestically, apply to vehicles delivered to customers starting Tuesday.
Only 16 models are now eligible for a full or partial tax credit, based on new thresholds that require a certain percentage of the battery parts and minerals to come from a qualifying country
That is down from 25 electric and plug-in models previously and limits the selection to vehicles built by four car companies: Tesla Inc., Ford Motor Co., General Motors Co. and Stellantis NV, which owns Jeep and Chrysler.
Not a single electric model from a foreign brand is now eligible for the subsidy. EVs from startups, such as Rivian Automotive Inc. and Lucid Group Inc., also didn’t make the cut, largely because their vehicles are too expensive.
The new tax-credit rules were put into place as part of the Inflation Reduction Act, a broad clean-energy, tax and healthcare law passed last year. With the changes, the Biden administration has sought to spur more U.S. production of electric vehicles and their batteries. Most EV batteries today are sourced abroad, with many materials and components coming from China.
For buyers to claim the full $7,500 tax credit, a certain set portion of battery parts must be made in North America and a percentage of critical minerals sourced in the U.S. or from certain friendly countries. A partial $3,750 credit is available for meeting one of these two battery-sourcing requirements.
Even if a particular model meets the battery criteria, it still must sell for under a certain price point, meaning those loaded up with costlier features and bigger batteries could be too expensive to qualify.
Many in the auto industry are concerned the slimmed-down list could dent demand for EVs, which still sell for thousands of dollars more than vehicles with internal-combustion engines.
“What we’ve seen is that price matters. There is a direct correlation,” said Elizabeth Krear, vice president of electric-vehicle practice at J.D. Power. “Government incentives absolutely affect consumer decisions.”
The revisions to the subsidy, introduced more than a decade ago to stoke buyer interest in EVs, comes as the Biden administration is pushing hard to boost the number of greener vehicles on U.S. roadways.
The Environmental Protection Agency last week proposed its toughest restrictions ever on tailpipe emissions, aiming to prod car companies into selling more EVs. The new standards aim for two-thirds of U.S. car sales to be electric by 2032.
In the past few years, momentum around EVs has been building with car companies and governments pledging to put an end to the gasoline vehicle. The share of EVs sold in the U.S. more than doubled in the past two years to 8.5% in February, according to industry research firm J.D. Power.
The transition has been pivotal for not only the auto industry but also other sectors, such as mining and energy, which need to supply the electricity and materials for battery-powered cars.
Dealers say the latest changes could make EVs a harder sell for the average consumer, especially when there are other hurdles to overcome, such as public-charging infrastructure that is lacking.
“We’re going to find out how much of this thing is mucked up,” said Rhett Ricart, chief executive of Ricart Automotive Group, a car-dealership chain in Ohio. “Every dealer I know is holding on to their belts to see what is going to happen,” he added.
The Treasury has been gradually rolling out new tax-credit requirements
since the Inflation Reduction Act’s passage last year. First, in August, it limited the credit to only EVs built in North America.
Then, in January, new restrictions on household income and the selling price of the vehicle were imposed. The battery-sourcing criteria was the last piece and its implementation was delayed to April after pushback from foreign allies
The revisions have been a win for GM, Tesla and others, who under the previous rules had hit a cap on the number of EVs a manufacturer could sell before its models no longer qualify. That cap was removed by the Inflation Reduction Act.
Nearly all of GM’s new EV models are eligible for the full $7,500 tax credit. Six Ford electric and plug-in hybrid models also qualify for a partial or full tax credit, including the Mustang Mach-E and F-150 Lightning.
Among Tesla’s models, some entry-level Model 3 sedans will get a $3,750 credit. That is because the car uses battery cells made in China. Higher-end Model 3s and all its Model Y configurations qualify for the full $7,500 credit.
Before the Inflation Reduction Act, about 92% of EV models on the market were eligible for the $7,500 tax credit, according to the Alliance for Automotive Innovation, an auto-industry lobbying group. That figure dropped to 43% in February.
Already, the changes have led to a windfall of new auto-factory investment in the U.S., with many foreign car companies and battery makers rushing to build facilities here to meet the new requirements.
The rule change has fallen hard on companies that import their vehicles or batteries, which has already dented sales, the companies have said.
“What it does is make you uncompetitive in the near term with other companies that were always here,” said Steven Center, the chief operating officer of Kia
’s U.S. operations. “It is really a terrible thing for the whole industry.”
Models made by Volkswagen
AG and Nissan Motor
Co. were also dropped from the latest eligibility list for not meeting certain requirements.
A Nissan spokesman said Friday the company supports the goal of boosting EV sales. “We have positioned Ariya and Leaf to offer a very strong value proposition,” he said.
For the average consumer, the new requirements are far more complex than those in place before the Inflation Reduction Act’s passage. Buyers now have to parse through a multistep list to determine whether they or the vehicle is eligible, dealers and analysts say.
The battery-materials and parts requirements also start at one threshold this year and then rise each year through the end of the decade, so a vehicle that qualifies today might not next year.
“They have made something really complicated,” said Stephanie Brinley, an automotive analyst at S&P Global Mobility. “Consumers don’t necessarily think about where their engines are built, or where their seats come from.”