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The final version of the Inflation Reduction Act was signed into law by President Joe Biden on Aug. 16, 2022. Among the 730 pages of the law are changes to the federal government’s electric vehicle (EV) tax credit plan. The modifications written into the Inflation Reduction Act could significantly alter the course of the country’s EV market now that it’s become law.
What Led to the New EV Tax Credits?
Passing the Inflation Reduction Act was a painstaking process, particularly in the closely divided Senate. The Senate approved the Inflation Reduction Act on Aug. 7 by a vote of 51-50, with all Democratic senators voting for the bill and all Republicans voting against it.
That list of Democratic senators notably included Sen. Joe Manchin (D-W.Va.), who had previously opposed the bill. Manchin had pointed to issues with the way that the old EV tax credit system was structured and called out automakers’ reliance on foreign battery suppliers.
“I don’t believe that we should be building a transportation mode on the backs of foreign supply chains,” Manchin told reporters in early August. “I’m not going to do it.”
The senator proposed several changes to the Inflation Reduction Act and after some modifications, Manchin and fellow Sen. Kyrsten Sinema (D-Ariz.) agreed to vote for it. The Inflation Reduction Act had a much easier time getting through the House of Representatives and was signed into law by Biden a few days later.
What Will Change With the New Electric Vehicle Tax Credit?
There are many significant differences between the old and new EV tax credits. Specifically, eligibility for drivers and for EV models themselves have been tightened.
How Did the Old EV Tax Credit Work?
The American Recovery and Reinvestment Act of 2009 (ARRA) allowed for a tax credit of between $2,500 and $7,500 for the purchase of an electric or plug-in hybrid vehicle. This worked like a tax deduction in that an individual would subtract this amount from their income, decreasing their overall tax liability.
EVs with battery capacities of at least 4 kilowatt-hours (kWh) that used an external charging source were eligible for the full credit of $7,500. Hybrid vehicles with a battery capacity of 4 kWh or more were eligible for a $2,500 tax credit plus $417 for each additional kWh of capacity.
For reference, a 2022 Nissan Leaf has a battery capacity of between 40 and 60 kWh, depending on the model. A 2022 Honda Accord Hybrid has a 1.3-kWh capacity.
Under the old system, only 200,000 vehicles from each manufacturer were eligible for the credit. This meant that the original tax credits introduced in the ARRA were set to expire within the next few years. Tesla and General Motors both reached the 200,000-vehicle limit in 2018.
How Will the New EV Tax Credit Work?
The new federal electric vehicle tax credit will include several key changes from the system outlined in the ARRA.
These differences include the following:
- Removes the 200,000-vehicle cap for manufacturers
- Introduces a $4,000 tax credit for purchasing used EVs
- Offers tax credits at the point of sale rather than as a tax deduction
- Removes eligibility for cars with Chinese-made battery components in 2025
- Requires that final assembly be in North America for vehicles to qualify for the credit
- Introduces price limits for the tax credit, set at $55,000 for cars and $80,000 for trucks, vans, and SUVs
- Introduces income limits of less than $150,000 for individuals, less than $225,000 for those filing as head of household, and less than $300,000 for those filing jointly
- Requires that certain minerals be extracted or processed in the U.S. or in countries under free trade agreements by 2024, with varying credits based on the percentage of materials being used
While certain incentives could put EVs within reach of new customers, automakers will likely face major challenges due to some of the new restrictions that have been signed into law. Time will tell what kind of impacts these changes could have on the “Great EV Takeover.”
How Will the New Tax Credit Affect the EV Market?
Nearly a decade and a half after the tax credit was first introduced, EVs have now claimed a significant piece of the overall auto market. Statistics show that the rate of market share increase has gone up quickly in the last decade, both in the U.S. and around the world.
According to EV-Volumes.com, the EV world sales database, the global market share of EVs has surged from 0.2% in 2012 to 8.3% in 2021. And, the rate of increase has been steadily progressing over the years.
Between 2014 and 2018, plug-in EV sales in the U.S. grew from just under 120,000 cars per year to more than 360,000. That’s an increase of just over 200%, and EV sales growth has largely continued since then.
With fundamental changes signed into law, however, that trajectory could start to be altered. Whether the new policies found in the Inflation Reduction Act will end up helping or harming the EV market remains to be seen.
How Could the New EV Tax Credit Help?
The new law could make EVs more affordable in multiple ways, potentially accelerating the “Great EV Takeover.” It could open up the EV market to a broader range of people – a sizable development in a segment represented primarily by white, middle-aged men making more than $100,000 per year.
The former tax credit worked on the back end, meaning that savings only came when individuals filed their taxes. The proposed bill moves that credit to the point of purchase instead, effectively working as a major discount that could make EVs easier for many to afford.
In addition, setting price limits for vehicle eligibility could lead to manufacturers producing less-expensive vehicles. On top of the 200,000-vehicle cap being lifted, automakers will have another reason to build mass-market EVs.
Also notable is the introduction of a tax credit for the purchase of used EVs. This makes previously owned electric vehicles a more affordable option and could incentivize current owners to sell their EVs and purchase new ones.
How Could the New EV Tax Credit Hurt?
While the new law could make EVs more affordable for drivers, it places additional restrictions on automakers. Some of these rules could be difficult for manufacturers to meet, especially in the time frame set out.
For example, cars with battery components from China won’t be eligible for the new EV tax credit in 2025. Many automakers rely on Chinese components for their batteries, as the country currently produces around 80% of the world’s lithium ion batteries.
Similarly, EVs assembled outside of North America could soon become ineligible under the new EV tax credit. Models would only qualify if automakers move their manufacturing to facilities located in North America.
Impacts of the New EV Tax Credit Remain Unclear
The new law could serve as a boon for domestic manufacturing, as Manchin and others who support the new EV tax credit argue, or it could hinder the growth of a burgeoning industry.
Now that the Inflation Reduction Act has been signed into law, changes are on the way. Automakers will likely begin searching for resources and manufacturing facilities that are closer to home. The impact on consumers is tougher to gauge, with larger incentives possibly being canceled out by production issues faced by car manufacturers.
Regardless of the law’s coming impact, the “Great EV Takeover” seems unlikely to slow down soon. However, it’s difficult to predict whether or not the new law will actually speed up the transition to EVs.
Read more about the challenges the auto industry faces in our articles explaining the semiconductor shortage and when the chip shortage may finally end.
