By - Tim Rosado
The Treasury Department published a proposed rule (April 17) with new requirements on critical mineral and batter components that will affect electric vehicle (EV) purchases from this point forward (i.e., April 18). Treasury initially announced the requirements at the end of March.
There has been some concern that the new requirements could undermine efforts to get more EVs more quickly on US roads. But the restrictions, along with other measures intended to advance US manufacturing, were necessary to build adequate legislative support to ensure passage of the 2022 Inflation Reduction Act (IRA), the law that extended and expanded production and purchasing tax credits, and other incentives. The IRA set the requirement parameters that guided the specifics of the now published rule.
Core EV Rule Provisions
Consumers are eligible for up to a $7,500 tax credit per EV, for individuals earning no more than $150K, $300K for joint filers, and $225K for heads of households. Used vehicles purchased from a licensed dealer for $25,000 or less, may also be eligible for up to a maximum credit of $4,000, though tied to lower income limits.
For an EV to be eligible for the full credit during the current fiscal year (2023), 50% of battery components must be manufactured in North America. Another 40% of critical minerals must be extracted, processed, and/or recycled in the US or in a country where the US has a free trade agreement. If just one of these two standards is not met, then tax credit eligibility is limited to half the full credit, or $3,750.
In addition to input content standards, the rules include two other key manufacturing standards: that “final assembly” of vehicles must occur in North America, and that the Manufacturer Suggested Retail Price (MSRP) must not exceed $80K for vans, sport utility vehicles and pickup trucks, and $55K for all other vehicles.
Until April, there had been concern that the guidance took too long to be issued, with Treasury generally permitting eligibility for the full credit despite mineral content requirements in the IRA. Going forward with the published requirements, vehicles placed-in-service on or after April 18 will be subject to content standards of law.
Perhaps the biggest near-term issue concerns the eligibility of specific vehicles. Treasury will generally permit vehicle eligibility based on the higher content standards where the US has a “free trade agreement” in effect, but the agency is taking an expansive view on the meaning of a free trade agreement (as the law does not define the term.)
Eligible international partners will include not only those in traditional and formally-approved (i.e., by the US Senate) trade agreements, but also newly-negotiated critical minerals agreements, including, according to Treasury, “if the agreements reduce or eliminate trade barriers on a preferential basis, commit the parties to refrain from imposing new trade barriers, establish high-standard disciplines in key areas affecting trade, and reduce or eliminate restrictions on exports or commit the parties to refrain from imposing such restrictions on exports, including for trade in the critical minerals contained in electric vehicle batteries.”
Some policymakers, notably Senator Joe Manchin (D-WV), have indicated that the law should be followed based on a narrower view of the meaning of a trade agreement, not necessarily one which permits mere enhanced trade relationships that are established just to help more vehicles be eligible for preferential treatment, including tax credits.
Starting next fiscal year (FY 2024 starting this coming October) and going forward, battery and mineral content increase under the guidance. It is not clear the extent to which expected new US battery manufacturing and US mineral production capacity will enter online to help meet both higher content standards and manufacture/consumer demand.
In addition for FY 2024, tax-eligible vehicles may not contain any battery components manufactured by a "foreign entity of concern." For FY 2025, tax-eligible vehicles may not contain any critical minerals that were extracted, processed, or recycled by a foreign entity of concern. China as a “foreign entity of concern” currently has the most important relational impact to these requirements. China produces US-bound battery components and is both the preeminent world-wide miner of critical minerals used for battery production as well as materials processing to extract such minerals from raw materials (including the materials shipped to China by the US and other countries.)
The ability and needed timeframe for the US to adequately transition off China materials and production capacity is a significant unknown, as are the implications on the overall US-China trade relationship including the ability of the US to have continued access to the Chinese market for US-made goods. Treasury says it will issue unique guidance on foreign-entity-of-concern matters pertaining to EVs.
Here and Now
For the immediate near-term, Treasury/IRS is maintaining a specific list of vehicles eligible for tax benefits under the rules. Reporting, including from Politico (April 17), provide lists of eligible vehicles, which do not include Chinese models, or models from Hyundai or Nissan. Many of the eligible models are only eligible for a partial, not the full tax credit.
Initially, the only eligible models only currently include those from Tesla, Ford, and General Motors. A single Volkswagen model was subsequently added to the list. The list could continue to change as manufactures adjust to meet content standards or can better justify eligibility.
Politics related to program implementation will play out in the coming months but are unlikely to affect near-term EV tax policy changes. Longer-term issues, such as those tied to China trade will begin to more clearly emerge once Treasury issues guidance pertaining to EV tax benefits and materials from countries of concern. The likely timing of the guidance is unknown but should issued at least in draft form by this summer.