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Tax bill’s electric vehicle credit limits discouraging to some

Rules requiring car parts to be supplied domestically or by U.S. allies, trade partners draw concerns

Sen. Debbie Stabenow, D-Mich., whose state is home to big automakers, said the industry is working to avoid China in its EV supply chains but the effort will take years.
Sen. Debbie Stabenow, D-Mich., whose state is home to big automakers, said the industry is working to avoid China in its EV supply chains but the effort will take years. (Bill Clark/CQ Roll Call file photo)

Democrats are discussing concerns that requirements attached to their expansion of electric vehicle incentives could be too harsh and block a significant portion of cars from qualifying.

The $7,500 tax credits to help consumers buy electric vehicles are dependent on whether key components are sourced from U.S. allies, constraints added to their climate, tax and health care package to force supply chains out of China and satisfy Sen. Joe Manchin III, D-W.Va.

Some senators now worry the capacity to deliver important electric vehicle parts can’t be built up fast enough in the U.S. and other eligible countries to meet the new tax credit requirements, though Manchin is likely to have the ultimate say.

“Unfortunately after they’re implemented … at this point it looks like companies won’t be able to use them,” Sen. Debbie Stabenow, D-Mich., told reporters this week.

Consumers would get the tax breaks directly, including an option to bake the credit into the price negotiated at the car dealership. But the benefits help automakers generate sales.

Stabenow — whose state is home to General Motors Co., Ford Motor Co. and Stellantis North America, which owns the Chrysler, Dodge, Jeep and Ram brands — said the industry is “working really, really hard” so that EV supply chains don’t have to run through China. But that effort will take years, she said.

At least one of Stabenow’s big constituents, GM, is keeping an open mind about the tax credit structure, although it is still reviewing the text.

“While some of the provisions are challenging and cannot be achieved overnight, we are confident that the significant investments we are making in manufacturing, infrastructure and supply chain along with the timely deployment of complementary policies can establish the U.S. as a global leader in electrification today, and into the future,” GM said in a statement earlier this week.

Some automakers are warning of constraints on incentives, like Autos Drive America, which represents a dozen foreign automakers including Toyota Motor Corp. and Volkswagen AG. CEO Jennifer Safavian said in a statement that the group is still working to understand the proposed tax credit’s impact.

“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,” Safavian said.

The Alliance for Automotive Innovation, which represents domestic and foreign automakers, supports Manchin’s goal of reducing dependence on other nations for critical minerals and says the industry is already moving to develop U.S. supplies.

But John Bozzella, the alliance’s CEO, said a “likely result” of the current bill is that “a significant number of consumers will not be able to take advantage of this credit in the early years when it is needed the most.”

The Senate’s other Michigan Democrat, Gary Peters, said the question is how long EV credits would be usable under the bill, which would escalate content requirements over the coming years.

Doubling down

Asked about the EV credit concerns this week, Manchin doubled down on his position.

“Tell them to get aggressive and make sure that we’re extracting in North America, that we’re processing in North America and that we quit relying on China,” he said. “I was very, very adamant — you know that I don’t believe we should be building this transportation mode on the backs of foreign supply chains. And I’m not going to do it.”

China dominates the supply of batteries needed to run electric vehicles, according to BloombergNEF’s 2022 outlook, though other regions are growing their capacity. The batteries require minerals such as lithium, nickel and cobalt, and China also leads in processing the critical minerals.

The “clean vehicle” credits in Democrats’ bill are meant to get more EVs on the road and reduce greenhouse gas emissions at a cost of $7.5 billion over a decade, according to the Joint Committee on Taxation.

Access to half the $7,500 per-vehicle credit would depend on whether at least 40 percent of the critical minerals used in a vehicle’s battery are extracted or processed in a country where the U.S. has a free trade agreement, or recycled in North America. That percentage would climb beginning in 2024, hitting 80 percent from 2027 on.

The other half would hinge on whether at least half of a battery’s components are manufactured or assembled in North America, with that percentage beginning to rise in 2024 and hitting 100 percent in 2029.

The caveats came into play for Democrats’ latest version of their budget reconciliation bill, which can bypass a filibuster in the 50-50 Senate and allows Democrats to act alone on party priorities like climate change. 

After months of courting Manchin and nearly scrapping any expansion of EV credits to get his vote, some Democrats are ready to take what they can get. The provisions would lift a 200,000-per-manufacturer cap on EV credits that exists under current law, a boon for companies like GM that have hit the limit.

“Oh my God, compared to nothing — let’s make sure we’re celebrating the fact that there are significant incentives for electric vehicles with some prioritization on North American” supply, Sen. Chris Coons, D-Del., said.

He added the bill will provide significant incentives for North American mining and processing of critical minerals, even though he acknowledged building that capacity, which poses environmental risks, is “a very hard thing to do overnight.”

“It is hard to make an electric vehicle that doesn’t rely on minerals from Indonesia, Chile, [Democratic Republic of the Congo] and China and China and China and China,” Coons said. “So we have a lot of work to do to align our supply chains with our ambitions.”

Of the countries Coons named, only Chile is among the 20 countries with a U.S. trade agreement.

Credits for batteries, minerals

Along with the sourcing mandates, Democrats added tax incentives for battery and critical minerals production in their deal with Manchin.

Manufacturers of battery cells and modules, materials like solvents and additives needed for energy storage, and minerals like lithium, nickel, cobalt and more would qualify for tax credits for each component produced and sold. For products other than critical minerals, the credits would start to phase out by 25 percent each year after 2029; mineral producers would continue to get the full credit.

The JCT estimated the new “advanced manufacturing production tax credit,” which would also benefit manufacturers of wind and solar energy components, would cost $30.6 billion over a decade — substantially more than earlier iterations of the bill before they added things like batteries and critical minerals.

Other Senate Democrats said they were looking at the total package to gauge its ultimate impact, with the vote calculus in the evenly divided chamber top of mind.

Sen. Elizabeth Warren, D-Mass., pointed to findings that the bill would allow the U.S. to hit a 40 percent reduction in emissions by 2030, an overall impact that includes the EV credits as written.

“I always want to see every piece, particularly ones that move us toward transition from carbon-based fuels to electric, but the pieces may interlock in critical ways, and we’ve got to take up a bill that 50 people will support,” Warren said.

Sen. Benjamin L. Cardin, D-Md., said the party is handling any concerns on the climate, tax and health care package “in a manner that will keep unity.”

The EV credits still face other hurdles. As part of the budget reconciliation process that allows Democrats to avoid the filibuster, a formal review with the Senate parliamentarian known as the “Byrd bath” must occur. Provisions without a sufficient budgetary impact could be on the chopping block, which may endanger the EV restrictions aimed at countering China’s supply chain dominance. 

Republicans are also allowed unlimited amendment attempts in the Senate, and Florida Sen. Marco Rubio already announced he plans to target the EV credits by proposing zero access to incentives for cars that source any battery components from China. 

Votes on the budget reconciliation package are expected to start later this week, stretching into the weekend or possibly early next week. The House is expected to return early from recess to vote, assuming the Senate can pass the bill.

Lindsey McPherson contributed to this report.

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