Electric Car Tax Breaks Will Benefit U.S. Car Brands

Beginning on Tuesday, rules determining which electric vehicles qualify for tax credits will benefit American brands such as Tesla and General Motors the most

Published on April 17, 2023

Electric Car tax credit changes

Beginning on Tuesday, rules determining which electric vehicles qualify for tax credits will benefit American brands such as Tesla and General Motors the most. Foreign automakers, such as Hyundai, will face significant challenges as a result of restrictions aimed at cutting China out of the supply chain.

Only ten vehicles will initially be eligible for $7,500 tax credits, accounting for less than a quarter of all battery-powered vehicles on the market in the United States.

However, those ten models include many of the most popular models and accounted for two-thirds of electric vehicle sales prior to the new rules going into effect.

According to a list published by the Treasury Department on Monday, Tesla Model 3 and Model Y models, the best-selling electric vehicles in the United States, will qualify for the full $7,500 credit, with one exception. Because the Model 3’s battery is manufactured in China, the base model will only be eligible for half of the credit.

G.M.’s Chevrolet Bolt, one of the most affordable electric vehicles on the market, will also qualify, as will sport utility vehicles and pickup trucks that the company plans to sell this year.

Because of rules requiring that a certain percentage of battery components and minerals like lithium come from domestic sources or trade allies, fewer Ford vehicles will qualify for the full $7,500 credit. According to Kelley Blue Book, Ford’s Mustang Mach-E was the third best-selling electric vehicle in the United States last year, but it will only be eligible for half of the credit because its Polish-made battery does not meet domestic sourcing requirements. The F-150 Lightning pickup will still be eligible for the full credit.

Stellantis divisions Chrysler and Jeep do not yet sell cars that run entirely on batteries, but several of their hybrid models will be eligible for at least some of the credit.

Hybrid vehicles that have batteries with a capacity of at least seven kilowatt-hours are eligible.

The rules give American automakers a temporary advantage over competitors such as Toyota, Volkswagen, and Nissan. The Treasury list did not include any foreign automakers, but it is expected to grow as companies adjust their supply chains.

Carmakers who qualify for the tax credits will have an advantage as electric vehicle sales take off. “It causes a multiplier effect in the market,” Paul Jacobson, G.M.’s chief financial officer, told reporters this month in New York. He went on to say that the rules are “very consistent with the strategy that we had already adopted.”

The rules stem from the Inflation Reduction Act, which Democrats passed last year in order, among other things, to combat climate change and encourage domestic manufacturing. The Treasury Department was in charge of developing regulations based on the legislation.

The law aims to reduce the auto industry’s reliance on China, which manufactures the majority of the world’s batteries and dominates raw material processing. The law also limits sales prices and excludes individuals earning more than $150,000 per year and couples earning more than $300,000. The rules also exclude vehicles manufactured outside of North America, including those manufactured in allied countries such as South Korea and Germany.

“We were not happy,” said José Muoz, CEO of Hyundai and Genesis Motor North America, in an interview at this month’s New York International Auto Show. Hyundai’s Ioniq 6 electric sedan was named World Car of the Year at the show, but because it is assembled in Korea, it will not be eligible for tax credits.

Hyundai, based in Seoul, is investing $10 billion in Georgia to build car and battery plants, allowing the company to meet Inflation Reduction Act requirements — but only for a few years.

Officials from the carmaker and the Korean government asked the Biden administration to allow Hyundai and Kia vehicles to qualify for credits while the factories were being built, but were told that such an exception was not permitted by law, according to Mr. Muoz.

The Hyundai car factory in Georgia is scheduled to open in 2025. The battery plant, which Hyundai is constructing in collaboration with SK On, will begin production in 2026. “We’re working on moving that date up so we can qualify earlier,” Mr. Muoz explained.

Tesla had already informed prospective buyers that the least expensive Model 3 sedan would qualify for only half of the credit, or $3,750. Tesla reduced the price of that car by $1,000 this month, to $41,990. After taking into account the partial credit, the car will effectively cost many buyers a little more than $38,000, roughly the same as a top-of-the-line Honda Accord and less than an entry-level BMW 3 series sedan.

Other Model 3 and Model Y SUV variants will continue to receive full credit. According to Kelley Blue Book, Tesla sold more electric vehicles in the United States last year than all other carmakers combined.
According to some auto executives, the rules are too stringent and undermine efforts to limit climate change. Other critics, such as West Virginia Democrat Senator Joe Manchin III, have complained that the Biden administration’s rules are too lax.

According to administration officials, the regulations strike a balance between promoting electric vehicles and developing a domestic supply chain.

According to the administration, seven vehicles qualify for half the credit, in addition to the ten that qualify for the full credit. Vehicles can receive half of the credit if, for example, their battery components are manufactured in the United States, Canada, or Mexico but the minerals used to make the batteries do not meet the sourcing requirements.

Ten previously qualified vehicles, including the Nissan Leaf and the Volkswagen ID.4, will be removed from the list, at least temporarily.

The Volkswagen ID.4, an SUV made in Chattanooga, Tenn., did not make the Treasury Department’s list on Monday because the company is still assessing its supply chain.

However, Pablo Di Si, CEO of Volkswagen Group of America, stated that he expected the model to qualify. According to Kelley Blue Book, Volkswagen was fourth in U.S. electric vehicle sales in the first three months of the year, trailing Tesla, GM, and Ford.

Five electric vehicles sold or planned for sale by General Motors this year will be eligible. Along with the Bolt, the Cadillac Lyriq and electric versions of the Chevrolet Equinox and Blazer SUVs, as well as the Silverado pickup, will be eligible for the full credit. G.M. and LG Energy Solution have started manufacturing battery cells in Ohio.

The new rules may be revised in response to public feedback. It is up to automakers to demonstrate their eligibility, but they are subject to Internal Revenue Service audits and may face penalties if they provide incorrect information. The Internal Revenue Service maintains a list of eligible vehicles that is regularly updated.

A commercial vehicle law provision allows companies to collect credits for all leased vehicles even if the cars do not meet sourcing and manufacturing requirements.

Automakers and their dealers can pass on the savings to people who lease cars, and as a result, Mr. Muoz said, Hyundai has seen an increase in leases. The company also offers cars through monthly subscriptions, allowing customers to take advantage of tax breaks and test drive electric vehicles.

However, he claims that this will not compensate for lost sales because most people prefer to buy rather than lease or rent a car.

“We can’t compete unless we dramatically lower our prices,” Mr. Muoz said. “From a financial standpoint, it’s impossible to make it work.”