Most electric vehicles are not eligible for federal tax relief

DETROITT — A tax credit of up to $7,500 could be used to cover the cost of an electric vehicle under the Inflation Reduction Act now on its way to final approval in Congress.

But the auto industry warns that the vast majority of EV purchases do not qualify for such a large tax break.

That’s mainly because of the bill’s requirement that to qualify for the credit, an electric vehicle must contain a battery built in North America with minerals mined or recycled on the continent.

And those rules are getting stricter over time — to the point where in a few years it might not be EVs eligible for the tax credit, said John Bozzella, CEO of the Alliance of Automotive Innovation, a major industry group. Currently, the alliance estimates that about 50 of the 72 electric, hydrogen or plug-in hybrid models sold in the United States would not meet the requirements.

“The $7,500 credit may exist on paper,” Bozzella said in a statement, “but no vehicles will qualify for this purchase for years to come.”

The idea behind the requirement is to boost domestic manufacturing and mining, build a robust battery supply chain in North America, and reduce the industry’s reliance on overseas supply chains that can be subject to disruption.

The production of lithium and other minerals used to manufacture EV batteries is now dominated by China. And the world’s largest producer of cobalt, another component of EV batteries, is the Democratic Republic of Congo.

While electric vehicles are part of a global effort to reduce greenhouse gas emissions, they require metallic elements known as rare earths, which are found in places such as Myanmar, where an Associated Press study found the urge to green energy has led to environmental destruction.

Under the $740 billion economic package passed by the Senate this weekend and nearing House approval, the tax cuts are set to take effect next year. For an EV buyer to qualify for the full credit, 40% of the metals used in a vehicle’s battery must come from North America. By 2027, that required threshold would be 80%.

If the metal requirement is not met, the automaker and its buyers are eligible for half the tax break, $3,750.

A separate rule would require half the value of the batteries to be manufactured or assembled in North America. If not, the rest of the tax credit is lost. Those requirements are also getting stricter every year, eventually reaching 100% by 2029. Yet another rule would require the EV itself to be manufactured in North America, excluding vehicles made abroad from the tax credit.

Car manufacturers generally don’t disclose where their components come from or how much they cost. But it’s likely that some versions of Tesla’s Model Y SUV and Model 3 car, the Chevrolet Bolt car and SUV, and the Ford Mustang Mach E will qualify for at least some of the credit. All those vehicles are assembled in North America.

The tax credit would only be available to couples with incomes of $300,000 or less or singles with incomes of $150,000 or less. And any truck or SUV with sticker prices over $80,000 or cars over $55,000 are not eligible.

There is also a new $4,000 credit for used EV buyers, a facility that could help modest-income households go electric.

The industry says the North American battery supply chain is currently too small to meet battery component requirements. It has proposed that the measure would expand the list of countries whose battery materials qualify for the tax credit to include countries that maintain defense agreements with the United States, including NATO members.

Part of the bill would require that no vehicle would qualify for the tax credit after 2024 if the battery components come from China. Most vehicles now have some parts sourced from China, the alliance said.

sen. Debbie Stabenow, a Democrat from Michigan and a key ally of automakers in Detroit, complained that Sen. Joe Manchin of West Virginia, a critical Democratic voter, had opposed tax cuts for the purchase of electric vehicles.

“I went back and forth with Senator Manchin, who frankly didn’t support any kind of credit, so this is a compromise,” Stabenow told reporters on Monday. “We’ll work through it and make this the best we can for our automakers.”

Manchin, a long-time tenacious Democrat who negotiated the terms of the deal with Senate Majority Leader Chuck Schumer, had blocked previous climate and social spending proposals.

Manchin’s office declined to comment. He told reporters last week that he wants automakers to “get aggressive and make sure that we win in North America, process in North America and that we cross China. I don’t believe we should build a mode of transport on the backs of foreign supply chains. I will not do it.”

Stabenow claimed 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’re working on it. Numerous 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 “value the demand that minerals for batteries be sourced close to home rather than from our geopolitical rivals.”

“By doing that,” she said, “you directly support high-paying jobs here in the United States … secure our supply chain and really improve our global competitiveness.”

Stabenow said she remains hopeful that the Biden administration can offer the tax credits next year as it works on the detailed rules for the battery requirements.

“We will continue to work with the automakers and the administration to get as much common sense into the regulation as possible,” the senator said.

Messages were left on Monday requesting comment from the White House and the Treasury Department, which would manage the credits.

Stabenow says he is pleased that the measure would restore tax credits for General Motors, Tesla and Toyota, all of which hit the limits under a previous bill and can no longer provide them. Also, Ford, she said, is approaching an EV cap.

————

AP writers Matthew Daly and Fatima Hussein contributed to this report from Washington.