Dreamstime Images
Dreamstime L 39667107

Changes in Store for the $7,500 Electric Vehicle Tax Credit

Aug. 17, 2022
With the passage of the Inflation Reduction Act comes new rules that determine which EVs are and aren’t qualified for the EV tax credit originally put in place in 2010.

Download this article in PDF format.

Back in 2010, the federal government rolled out a program offering $7,500 in tax credits to purchasers of electric vehicles (EVs). The program was put in place to incentivize people to buy more fuel-efficient vehicles. The idea was that the credit would effectively reduce the cost of an EV to the point where its price was on par with that of an internal combustion vehicle.

At the time, several states also began offering their own, additional tax credits to complement the federal program and put EVs within reach of an even broader segment of auto buyers. According to the IRS, the Section 30D(a) credit applies to taxpayers who purchased a car or truck that draws energy from a battery with at least 4 kilowatt hours and that may be recharged from an external source. The agency says that the credit ranges between $2,500 and $7,500, depending on the capacity of the battery.

The credit begins to phase out when individual manufacturers sell more than 200,000 qualified vehicles. And while some automakers’ EVs have already been phased out of the federal program, Car and Driver says “many vehicles still qualify” for the credit.

Once passed into law, the Inflation Reduction Act may change the way the tax credit is applied and even phase certain vehicles out to the point where few (if any) new EV purchasers qualify for it.

Here’s How it Works

According to AP News, the bill’s requirement that an EV must contain a battery built in North America—and with minerals mined or recycled on the continent— to qualify for the credit could leave a lot of vehicles off of the list. The requirement was put in place to incentivize domestic manufacturing and mining, build a robust battery supply chain in North America and lessen the industry’s dependence on overseas supply chains, the publication adds.

Here’s the rub: The production of lithium and other minerals that are used to produce EV batteries is now dominated by China, AP reports, and the world’s leading producer of cobalt—another component of the EV batteries—is the Democratic Republic of Congo. Under the Inflation Reduction Act, the tax credits would take effect in 2023. If the metals requirement isn’t met, the automaker and its buyers would be eligible for 50% of the credit, or $3,750.

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 reach 80%. John Bozzella, CEO of the Alliance of Automotive Innovation, told AP that the group estimates that about 50 of the 72 electric, hydrogen or plug-in hybrid models that are sold in the U.S. wouldn’t meet the requirements for the credit. “The $7,500 credit might exist on paper,” he said, “but no vehicles will qualify for this purchase over the next few years.”

Determining Eligibility

According to the Washington Post, the existing EV consumer tax credit will no longer be available once the bill is signed into law. However, it says people should still be able to claim the credit if they purchase an EV before the signing—provided that the vehicle is eligible under the current requirements. “That means an electric car from a manufacturer that has reached the 200,000 vehicle cap, such as Tesla or General Motors, wouldn’t be eligible,” the publication adds.

In the short term, the Washington Post reports that changes to the EV tax credit are probably going to eliminate a lot of vehicles from eligibility for the credit. For instance, cars that aren’t assembled in North America are expected to immediately become ineligible. At present, such vehicles could include those from Hyundai, Kia and Toyota, among others, it reports.

“Other models of cars, regardless of where they are assembled, would not qualify because they are too expensive,” the publication points out. That’s because to be eligible for a credit, new electric vans, SUVs or pickup trucks can’t cost more than $80,000, while the price of other types of vehicles can’t exceed $55,000.

In the long term, the new EV incentives may present a significant improvement over the existing tax credit system, and help middle-class Americans afford EVs. “They just may have to wait for a couple more years for automakers to adapt to the new requirements and vehicle supply to increase,” the Washington Post adds.

Voice your opinion!

To join the conversation, and become an exclusive member of Supply Chain Connect, create an account today!

About the Author

Bridget McCrea | Contributing Writer | Supply Chain Connect

Bridget McCrea is a freelance writer who covers business and technology for various publications.