President Joe Biden’s flagship economic legislation initially promised to trigger a surge in demand for American-made electric vehicles (EVs) by offering attractive tax incentives. However, a year later, the adoption of EVs in the US remains subdued, as both car buyers and manufacturers grapple with restrictive qualifications that limit eligibility for many existing electrified models.
The threshold for receiving full tax credits is poised to rise further due to new regulations aimed at curbing the sourcing and manufacturing of foreign batteries. Automakers, already facing accumulating EV inventories, might need to restructure their supply chains to ensure they don’t lose their eligibility for these incentives, potentially impacting the affordability of their electric vehicles.
The intention behind these rules is to reduce America’s reliance on China for EV components and raw materials. However, the implementation of these requirements has been uneven, leading to fewer EVs and consumers meeting the criteria for tax credits.
Currently, out of the 97 electrified vehicles available in the US, only 18 qualify for some or all of the tax credits established by the Inflation Reduction Act. This number has decreased as the new restrictions took effect.
Under the Inflation Reduction Act, consumers can receive tax breaks of up to $7,500 for purchasing vehicles that meet certain cost, income, and assembly criteria. The most intricate and contentious requirements are related to the origin of critical components within the EV’s battery.
The regulations split the credit into two parts: $3,750 is available for vehicles with at least half of their battery components sourced from North America, and the remaining credit is accessible if 40% of the value of the battery’s raw materials is domestically extracted or processed, or if they originate from countries with US free-trade agreements. These requirements will become more stringent over time.
These incentives coincided with a significant uptick in electric vehicle adoption last year. Although EVs constitute less than 1% of the 250 million cars, SUVs, and light trucks on US roads, they represented 5.8% of all new car sales in 2022, up from 3.2% the previous year.
Genevieve Cullen, the president of the Electric Drive Transportation Association, a Washington trade association advocating for EV-friendly policies, stated that the Inflation Reduction Act signifies “unprecedented federal investments” that have already driven significant development across the nation.
Despite some market volatility earlier in the year, the industry appears on track to achieve over 1 million EV sales in the US for the first time in 2023. During the second quarter of 2023, when the new battery component and critical mineral rules began to take effect, automakers sold 295,355 EVs. This marked an increase from the 258,882 units sold in the first quarter of the year but a decline from the 442,740 units sold in the second quarter of the previous year.
The surge in EV sales during the second quarter of 2022 was partially attributed to high gasoline prices experienced at that time.
Andrew Starling, the dealer principal at Starling Automotive Group in Orlando, which owns Chevrolet dealerships in Florida and South Carolina, remarked that the Inflation Reduction Act has clearly expedited the growth of the EV market, despite the more complex tax credit regulations. He noted an increase in EV sales at his stores this year.
Nevertheless, the changes have led to some customer confusion. Vince Sheehy, the president and CEO of Sheehy Auto Stores, which operates 30 dealerships in the region between Baltimore and Richmond, noted that the Inflation Reduction Act has complicated EV sales prices, especially for customers who are price-sensitive. He mentioned that EVs under $50,000 are hard to find, making them less competitive in the market for cost-conscious consumers.
The average selling price of an electric car dropped to $53,469 in July 2023, down from $53,682 in June, as companies like Tesla and Ford reduced prices.
Automakers with electric models that do not qualify for tax credits have utilized a loophole granted by the Biden Administration, exempting leased vehicles from stringent battery and critical mineral requirements.
After extensive lobbying following the passage of the Inflation Reduction Act, the Treasury Department announced in December that leased cars and trucks would be considered commercial vehicles, thus avoiding sourcing regulations. This loophole, advocated for by companies like Hyundai Motor Co. and Rivian Automotive Inc., drew criticism from opponents of a broad interpretation of the EV tax credit provisions in the law.
Sustaining the momentum of EV adoption might require additional adjustments from automakers, who have already adapted to meet the Treasury Department’s initial sourcing and manufacturing restrictions.
The Treasury’s definition of “foreign entities of concern” has been somewhat ambiguous, although officials have indicated that it includes Chinese companies. Starting in 2024 and 2025, respectively, no tax incentives will be available for vehicles containing battery components or critical minerals from such foreign entities.
Albert Gore, the executive director of the Zero Emission Transportation Association trade group, representing EV manufacturers like Tesla and Rivian, explained that companies have managed to restructure supply chains and invest in domestic manufacturing to meet the eligibility criteria this year. However, he anticipates that it will become more challenging as additional criteria are introduced. He added that changes in the eligibility status of specific models could be temporary, and a drop in a model’s tax credit could result from the time needed to scale up the production of parts or minerals within the US.