New EV Tax Credit Rules Could Make Things Worse Before They Get Better

The U.S. Treasury Department along with the IRS released its Notice of Proposed Rulemaking (NPRM) on the new clean vehicle provisions—EV tax credits—detailed in President Biden’s Inflation Reduction Act (IRA) and it looks like the plan doesn’t have any quick fixes. The basic elements are still there and for the most part is unchanged from the changes enacted by the original IRA. The $7,500 credit as well as the $80,000 MSRP limit for SUVs, trucks, and vans like Ford F-150 Lightning and the $55,000 MSRP limit for other smaller vehicles like the Chevrolet Bolt remain in place. Here’s how that could change soon.

The Critical Mineral Requirement and Foreign Entities of Concern

To qualify for the full $7,500 tax credit, vehicles have to meet sourcing requirements for critical minerals and battery components. If a vehicle meets one out of the two requirements it can qualify for a $3,750 credit. So what is the Critical Mineral Requirement? As the NPRM states: “The applicable percentage of the value of the critical minerals contained in the battery must be extracted or processed in the United States or a country with which the United States has a free trade agreement, or be recycled in North America.” For 2023 that percentage value is 40 percent which we already knew when we reported on the tax credits in February. Detailed in the NPRM released today is that the applicable percentage is set to increase by 10 percent year over year until 2027 when the the threshold reaches 80 percent.

That gives automakers just four years to find suppliers domestically or with a free trade agreement country that can provide double the amount of the “critical materials” that they are currently required to source. Some politicians believe that the increasing critical mineral requirements will eventually end over-reliance on China for materials sourcing. The NPRM states that, beginning in 2024, a vehicle will be ineligible for tax credits if any battery components are manufactured by a “foreign entity of concern” (FEOC) and beginning in 2025 a vehicle cannot have any critical materials “that were extracted, processed, or recycled by a foreign entity of concern.”

Is China a Foreign Entity of Concern?

At the moment, we don’t know who the United States Government considers to be a foreign entity of concern in the context of the NPRM. U.S. Deputy Secretary of Energy David Turk said during a group call with journalists that the administration is “working expeditiously” to finalize the FEOC definition.  On the call, a reporter with the New York Times proposed a scenario in which critical minerals were mined China but processed in a free trade partner country such as Canada and asked if those minerals would still qualify under the new rules. Deputy Secretary of the Treasury Wally Adeyemo responded that scenario “may not actually be a way that this works,” and instead presented an example of Australia mining critical minerals and instead of sending those minerals to China for processing, they could send them to Japan—another free trade agreement country—instead.

This response seems to strongly suggest that China will ultimately be considered a FEOC under the new rules. Should those rules go into effect now, it would throw current EV eligibility into disarray. It was suggested by Deputy Secretary of the Treasury Adeyemo that holding off the FEOC rules until 2024 for battery components and 2025 for critical minerals is an effort to give automakers time to push FEOCs out of their supply chains. It would be surprising if most companies could manage such a shift in just a couple of years.

What Does This Mean for Car Buyers?

During the call, when asked by a Reuters reporter about the current number of models that qualify and if that number will grow or shrink when the rules go into effect in April, 2023, Deputy Secretary of the Treasury Wally Adeyemo responded that the rules “will likely restrain the number of vehicles that qualify in the short term,” but said he believes over the long term manufacturing incentives for automakers will result in more tax credit eligible EVs becoming available.

We don’t know what Secretary Adeyemo has in mind when he said “long term,” but in the short term, having even less models that qualify for tax credits will drive competition between consumers up and may result in higher mark ups, making the already tricky prospect of buying an EV at a decent price more frustrating. Expect an update to our list of tax credit qualifying EVs soon as more information becomes available. We’ll learn more about which vehicles qualify when an updated list is published on April 18, according to NPR.

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