Tax Credits for Electric Vehicles Are About to Get Confusing

Next year could be confusing for anyone shopping for an electric car.

A law that takes effect on Jan. 1 will both expand and scramble the list of vehicles that qualify for federal tax credits of up to $7,500 in ways that officials and carmakers are still trying to sort out.

The Biden administration is expected to put out a new list of cars that will qualify for the credits later on Thursday. But that list might be good for only three months as officials implement other parts of the law.

Tesla and General Motors, which had exceeded a cap on the number of cars that could collect subsidies under an older law, will be eligible again — at least until March. The new law, the Inflation Reduction Act, abolishes the cap. But imported cars that qualified under the old law will no longer be eligible; these include vehicles made by brands like Hyundai and Kia.

The list of qualified vehicles is expected to get a lot shorter sometime in March after the Biden administration puts in place new rules intended to force carmakers to buy batteries and raw materials from suppliers in the United States and its trade allies. Very few if any electric cars might qualify right away, auto experts said.

The Inflation Reduction Act, signed into law by President Biden in August, was designed to promote battery-powered vehicles while providing incentives for companies to make them in North America. It is also designed to exclude rivals like China and Russia from the supply chain.

But the details of how to apply those principles were left to the Treasury Department, which has had only four months to work through scores of brain-numbing technical details not fully addressed in the legislation.

For example, to qualify for credits, at least 40 percent of the minerals in a vehicle’s battery, measured by their value, must come from the United States or a trade ally. The quota rises in steps to 80 percent in 2027. But it is devilishly difficult to track the origin of raw materials. And the law didn’t specify which countries should be considered trade allies.

A preliminary list issued by the Treasury Department Thursday includes countries like Chile, Nicaragua and Singapore because they have trade agreements with the United States. But it excludes the European Union, with which the United States does not have a trade pact. (Officials left open the possibility that countries could be added to the list later.)

Federal regulators face a dilemma. If they interpret the law too strictly, carmakers may not even try to qualify for the credits. If they interpret the law too liberally, it might not achieve one of its key aims — to compel carmakers to create jobs in the United States and pivot supply chains away from China or other geopolitical adversaries.

China dominates the processing of battery raw materials like lithium and graphite, and it controls mines in the Democratic Republic of Congo, the source of most of the world’s cobalt, an essential battery ingredient.

Since August, only cars assembled in the United States, Canada or Mexico have been eligible for the full credit of $7,500. On Jan. 1, the law abolishes a limit of 200,000 vehicles per manufacturer under an older law.

After March, or whenever the Treasury Department decides how to implement the limitations on imported battery minerals and battery components, the rules will get a lot tougher. It’s possible that no vehicles will qualify immediately.

In other words, car buyers might have a brief window of time — from January to March — to collect the full credit. Then they will have to wait months or years for mines to begin producing ore in friendly countries, refineries to be built, and domestic battery assembly lines to start rolling, analysts say.

Pablo Di Si, the chief executive of Volkswagen of America, which builds electric vehicles in Chattanooga, Tenn., and Mexico, has pleaded for automakers to be given a few years to adapt. “When you have an industry that has been disrupted the way we have been disrupted,” he said in an interview, “you cannot make these sudden changes in technology, in production, in mineral extraction.”

It is considered unlikely that Congress will revise the law, given that Republicans will soon control the House. Even with Democratic control of both houses, the Inflation Reduction Act passed only after the Senate majority leader, Chuck Schumer, made major concessions to Senator Joe Manchin III, Democrat of West Virginia, who had initially joined Republicans in opposing it.

But it appears that the Treasury will try to give carmakers and buyers a break by interpreting the law flexibly. For example, a battery component that is assembled in the United States, Canada or Mexico will probably pass muster even if it is made from imported parts, the Treasury Department said Wednesday in a preliminary report.

Some aspects of the law are fairly clear. Well-heeled car buyers — defined as anyone whose modified adjusted gross income on their tax returns is $150,000 for individuals and $300,000 for couples — won’t be able to claim credits.

Sport utility vehicles, vans and pickups are eligible for credits only if the manufacturer’s suggested list price is less than $80,000. For sedans and other vehicles, the price cap is $55,000. For plug-in hybrids, the size of the tax credit depends on battery size.

That means pricey electric vehicles from companies like Mercedes-Benz and Lucid will probably not qualify even though they are made in the United States. Either their sticker prices are too high, or their customers are too rich.

How to classify vehicles is another issue. Officials are likely to define an S.U.V. more narrowly than carmakers’ marketing departments do.

There is a loophole in the law that could provide a way for consumers to take advantage of the credits even for vehicles that don’t meet domestic sourcing requirements.

The act exempts commercial vehicles from the mineral and battery sourcing quotas, and the requirement that vehicles be made in North America. Auto industry lobbyists want the administration to interpret that provision to mean that cars purchased by leasing companies are commercial vehicles.

If that argument flies, and the Treasury Department indicated Thursday that it will, rental companies, ride-share services and leasing companies could collect credits on imported vehicles or those with foreign parts and pass the savings on to their customers.

The loophole provoked the ire of Mr. Manchin. “I can guarantee that companies will focus their attention away from trying to invest in North America to meet the requirements” of the law, he said in a statement, “and will instead continue with business as usual, putting our transportation sector further at risk.”

The exception for leasing companies may help mollify Asian and European allies who have complained the Inflation Reduction Act discriminates against their carmakers. South Korean leaders are particularly aggrieved.

South Korea is a close military ally of the United States, and Hyundai is investing $5.5 billion to build batteries and electric vehicles in Georgia. But the plant, which will employee 8,000 people, won’t begin mass producing vehicles until 2025.

Until then, the rules are a blow to Hyundai’s ambitions in the United States, where its Ioniq 5 has been a very popular electric model. During the first nine months of the year, Hyundai and its sister brand Kia had almost 8 percent of the U.S. electric vehicle market, second only to Tesla, which had a commanding 64 percent, according to Kelley Blue Book. Hyundai has asked that its vehicles qualify for credits until the Georgia operation is up and running, but it appears unlikely that U.S. officials will grant that request.

For the first time, used electric vehicles will be eligible for credits of up to $4,000. There are restrictions. The credit applies only to vehicles sold for less than $25,000 that are at least two years old. Buyers can’t earn more than $150,000 if they file taxes as a married couple, and no more than $75,000 if they file singly. The credit applies to a vehicle just once, and buyers can’t claim a credit more than once every three years.

Still, the credit means that electric vehicles ought to be more accessible to middle-income buyers. “It has the potential to transform the way the used-car industry works,” said Scott Case, chief executive of Recurrent, a firm that tracks the used electric vehicle market.

For buyers confused by all these new rules, there will be ways to know whether vehicles they’re considering will be eligible for the tax credits. The Department of Energy maintains a running list of cars that qualify — the list will be updated Thursday afternoon. Recurrent’s website allows buyers to type in a vehicle identification number and find out whether a used car is eligible.

One way that buyers can ensure that they’ll receive the credit is to insist that dealers apply it to the purchase price. That was not allowed under the old rules but will be possible beginning in 2024. The change will help people whose taxes are too low to claim the full credit.

For all their complaints about the way the Inflation Reduction Act was written, carmakers generally like the legislation. Speaking to investors in October, Jim Farley, the chief executive of Ford, noted that the law contains subsidies for battery production that are separate from the tax credits for car buyers that could be worth $7 billion for the company and its suppliers through 2026. Those subsidies should help reduce electric vehicle prices.

The Inflation Reduction Act, Mr. Farley said, will “have a wide range of positive impacts for both our customers and for Ford.”

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