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In a major win for automakers and future electric vehicle buyers, tax credits for the purchase of EVs are likely to get a new lease on life, thanks to a surprise deal between Sen. Joe Manchin (D-W.V.) and Senate Majority Leader Chuck Schumer (D-N.Y.).
The pair had been covertly negotiating to revive select components of the House-passed Build Back Better bill, including its climate change provisions, and announced an agreement last week that they branded the “Inflation Reduction Act of 2022.” Schumer intends to push the deal forward under special “reconciliation” rules of the Senate, which allow the Democrats to pass it without any Republican support, so long as all 50 Democrats are on board. Sen. Krysten Sinema, the Arizona Democrat who is now considered the likeliest holdout in her caucus, has not said yet whether she’ll support it.
The deal, if it becomes law, will extend the current $7,500 per vehicle credit until the end of 2032, while making significant changes to it, including imposing income and vehicle price restrictions and domestic manufacturing requirements. It would also create a new, $4,000 credit for the purchase of used EVs from dealers, which would carry lower income and vehicle price limits. The changes overall would be a win for middle class buyers.
The current tax credit of up to $7,500 phases out after automakers produce 200,000 electric vehicles. Tesla
and General Motors
have both maxed out their credits, and Toyota reached the 200,000 threshold earlier this summer, with its phaseout set to begin in October. CEOs of Toyota Motor North America, Chrysler parent company Stellantis and Ford Motor
Company — which is also nearing the 200,000 maximum — sent a letter to congressional leaders in June urging them to lift the cap. “The coming years are critical to the growth of the electric vehicle market and as China and the EU continue to invest heavily in electrification, our domestic policies must work to solidify our global leadership in the automotive industry,” the letter said.
Manchin had previously been seen as an obstacle to the lifting of the cap. He had argued that providing a credit would be “ludicrous” given the long waiting lists for certain electric vehicles. But he had also hinted at changes he would want, including restrictions on the income of eligible buyers and on the cost of the vehicle. The final shape of the proposal clearly reflects his priorities. Among other things, it removes a $4,500 bonus credit in the House BBB bill for EVs built with union labor — a provision which Manchin had called “wrong” and “not who we are as a country.” (Toyota, Honda and Tesla, who aren’t unionized in the U.S., had vocally criticized the measure and significantly, Toyota has a plant in West Virginia.)
Under the current text of the legislation, couples filing jointly with modified adjusted gross income of more than $300,000 in the year they bought an EV or the previous year, would be ineligible for the $7,500 new EV credit. The cut-off would be $225,000 for someone filing as a head of household and $150,000 for all others (meaning single filers and married folks filing separately). For the $4,000 used vehicle credit, income is limited to $150,000 for those filing a joint return, $112,500 for heads of household, and $75,000 for others.
Eligibility for the new vehicle credit is also contingent on retail price limits: up to $55,000 for cars and up to $80,000 for trucks, SUVs and vans. The used EV credit is restricted to vehicles costing less than $25,000 and models at least two calendar years old.
Joe Britton, executive director of the Zero Emission Transportation Association, said he expects the price tag restrictions “to be huge drivers of price,” though lowering price may be complicated by some of the other requirements for credit eligibility.
The current credit is nonrefundable, meaning that individuals can only receive the full $7,500 if they have at least $7,500 in federal income tax liability (that includes income tax withheld, but not Social Security and Medicare taxes). The new credit, according to Britton, would become refundable in “kind of a circuitous way,” as buyers would be able to “transfer the value of that credit to the dealership or the manufacturer and get that [credit amount] taken off the price.”
Britton suggested dealers might have to verify a buyer’s previous year income (and hence eligibility for the credit) using some sort of quick link to the Internal Revenue Service. Mortgage companies, for example, typically do such quick income verification with the permission of an applicant.
In terms of the new income restrictions, Britton said ZETA had been advocating for a “universally accessible credit” because “if you narrow the credit, you narrow the public benefits.” However, he noted that since several domestic manufacturers had maxed out their credits or were nearing the cap, the “baseline for one step forward was pretty low.”
Much of the text in the Inflation Reduction Act of 2022 is written to promote domestic manufacturing and avoid reliance on Chinese supply chains. China has become a global force in the EV industry, selling 1.3 million EVs in 2020 for more than 40% of global sales that year. It has also quickly positioned itself to become a major player in battery production, making up 85% of the global market in anodes, cathodes, separators and electrolytes — the four components which comprise about 60% of a battery cell’s cost, according to UBS Group AG.
While Chinese-manufactured electric vehicles are eligible under the current credit, the reconciliation bill would make the credit contingent on the final assembly of the EV being in North America, as well as on a certain portion of the vehicle battery’s critical minerals and components coming from either the U.S. or a country with which the U.S. has a free trade agreement.
Half of the $7,500 credit is conditioned on at least 40% of the vehicle battery’s critical minerals coming from the U.S. or counties with which the U.S. has a free trade agreement. The other half is based on at least half of the battery’s other components coming from the U.S. or one of the 20 countries with which the U.S. currently has a free trade agreement. Both the battery components and mineral requirements quickly increase on a yearly basis, with the minerals requirement doubling to 80% in 2027 and the battery components requirement reaching 100% in 2029.
The timeframe to pivot to materials from the U.S. and its free trade partners is “very aggressive” and “will require a distinct operation that people are going to be racing to comply with,” Britton said. While he thinks it may be challenging to avoid sourcing minerals and battery components from Chinese companies, “if done right and done with permitting reforms so that we can meet these targets, it can be a real win for the country.”
The President and CEO of Autos Drive America, a group that represents several international automakers and advocates for free trade, said in a statement that international automakers “continue to make investments across the country to boost production of electric vehicles and to make them accessible to more Americans.”
“While we work to understand the full impact the Clean Vehicle Credit contained within the Inflation Reduction Act of 2022 would have on the automotive industry and consumers, we encourage Congress to steer clear of any policy that would constrain electric vehicle production, hinder consumer adoption, and make it more difficult to achieve our shared climate goals,” said Jennifer Safavian.
In yet another nod to Manchin, the bill would expand the EV credits to fuel cell vehicles, which are powered by hydrogen. “I’m a big believer in hydrogen, because I don’t have to depend on a foreign supply chain to produce the horsepower we need to a carbon-free society as we move to transition,” Manchin said during the CERAWeek by S&P Global energy conference in March.
While Sinema (unlike Manchin) wasn’t involved in the talks with Schumer, in interviews on Sunday and Monday, Manchin expressed hope that she won’t be a hard sell. “She has a lot in this bill,’’ he told reporters Monday. On CNN yesterday he said when she “looks at the bill and sees the whole spectrum of what we’re doing and all of the energy we’re bringing in, all of the reduction of prices and fighting inflation by bringing prices down, by having more energy, hopefully, she will be positive about it.” And on NBC’s “Meet the Press,” Manchin said Sinema is a friend of his and she had “tremendous input in this legislation.”