EV tax credit may be out of reach for most consumers
To qualify, batteries must get at least 40 percent of their critical minerals from the U.S. or free trade partners. Most now come from China.
While the climate, health care and tax law includes an overhaul for the electric-vehicle tax credit, allies and industry representatives have expressed concern that the statute may ultimately benefit too few consumers.
The law includes a tax credit of up to $7,500 for the purchase of a new electric vehicle. However, to qualify for the full credit after this year, at least half of the battery's components must be manufactured or assembled in North America, while at least 40 percent of the critical minerals must have been sourced from the U.S. or a free-trade partner.
Both requirements will become stricter over time. The tax credits also include buyer income restrictions and price caps of $55,000 for cars and $80,000 for vans, trucks and SUVs.
The requirements are intended to support the development of the domestic electric vehicle supply chain and address the concerns of some — including Sen. Joe Manchin III, D-W.Va. — who have said that U.S. manufacturers are too reliant on foreign suppliers. China alone accounts for over 70 percent of global EV battery production capacity.
“We're going to be absolutely so taken advantage of to the point where we're going to be held hostage by the foreign supply chain that China has a grip on,” Manchin said at a June Senate hearing. “I just can't believe that we're even thinking about going down that path.”
As first proposed last year, the tax credit would have applied only to batteries manufactured in the U.S. by union workers. But Canada and Mexico raised concerns that this would violate the U.S.-Mexico-Canada Agreement on trade. Although, as enacted, the law complies with the USMCA, other major trading partners have argued the language violates World Trade Organization regulations.
Miriam García Ferrer, a spokesperson for the European Commission, said the current design of the electric vehicle tax credit is “clearly discriminatory” and favors certain countries and North American manufacturers at the expense of European Union exports to the United States.
“The EU and the U.S. share the objective to reduce greenhouse gas emissions and to make the transport sector more sustainable, and we should work hand-in-hand to achieve this goal,” said García Ferrer.
South Korean officials have raised concerns with their American counterparts that the tax credits will likely exclude models manufactured by Kia and Hyundai, in violation of WTO principles that foreign and locally produced goods should receive the same tax treatment.
“It's not a very complicated issue. The EV tax credits as written are a flat-out contradiction of the national treatment obligations,” said Gary Clyde Hufbauer, a senior fellow at the Peterson Institute for International Economics.
Hufbauer said that if either the EU or South Korea chooses to file a protest at the WTO, the U.S. could attempt to argue the credits qualify for an exemption under a provision intended to protect exhaustible natural resources and human, animal or plant life.
Ultimately, however, the WTO may be unable to resolve such a complaint. Its appeals body has two vacancies and has not had a quorum since December 2019 because the U.S. has blocked appointments.
Even if the WTO initially rules against the credits, Hufbauer said the U.S. could “appeal to the void,” leaving the case without any final resolution and allowing the U.S. to continue providing the credits.
The tax credits may ultimately benefit few consumers in the short term while the industry pushes to increase domestic manufacturing. The Alliance for Automotive Innovation, an industry group whose members include Ford, General Motors, Toyota and other large automakers, unsuccessfully called for a change to the law’s tax credit provision prior to passage.
“On the demand front, we’ve said the legislation’s purchase incentive was a missed opportunity, especially while raw material and battery supply chains are still coming into place,” John Bozzella, the alliance's CEO, said in a statement after the bill was signed into law last month.
The U.S. mines some lithium, cobalt and nickel, although larger supplies exist in multiple states. The Nature Conservancy estimated that there is enough lithium in the contiguous U.S. to potentially supply the world for over a century.
The nation’s largest automakers have announced investments to bolster their supply chains in the coming years. Ford announced $50 billion in spending over the next decade, while General Motors plans to invest $35 billion. Last week, Toyota announced investments that include $2.5 billion for a North Carolina battery plant, and Honda said it will partner with South Korea-based LG Energy Solutions to build a $4.4 billion battery plant.
However, these investments will take some time to materialize, and an analysis released Aug. 22 by research firm Fitch Solutions estimated that zero vehicles will be eligible for the full tax credit in the short term. This, Fitch added, would slow EV sales among low- and middle-income consumers who cannot afford to purchase an EV without the credit.
Brian Willis, spokesperson for the Zero Emission Transportation Association, said his group doesn’t believe the law is perfect but that it will go a long way toward meeting federal climate goals. Last year, the Biden administration set a target that half of all new vehicles be zero-emission models by the end of the decade.
The law included a tax credit of up to $4,000 for a previously owned electric vehicle that is not subject to the same sourcing requirements. It also lifted the 200,000-unit-per-manufacturer cap that had prevented automakers such as Tesla and General Motors from being eligible for the tax credit.
Willis said other provisions in the law, such as advanced manufacturing production credits, will help build out the domestic supply chains needed and address national security concerns. He added that these provisions, taken as a whole, will increase investment in the sector.
“This is a two-year runway to really get everything off the ground and mainstreamed, and you have a situation where companies are rightly pitted towards competing with one another to enhance the consumer experience as much as possible,” Willis said.