Beginning this month, the American Department of Treasury will tighten requirements for customers to qualify for a substantial income tax break when they purchase new EVs, mandating that critical components, particularly materials for batteries, be primarily sourced from North America. The tax credit of not less than $7,500 offered to consumers who buy new electric vehicles was made possible by the Inflation Reduction Act, which was passed into law in 2022. However, due to the stricter new regulations on the source of battery materials and components set to be imposed on April 18, 2023, several electric vehicles are expected to miss out on this tax credit from the government.
The added adjustments have added some complexity to the auto industry. Given that electric vehicles spearheaded by Tesla have witnessed record-breaking sales in the United States and accounted for approximately 6% of total car sales in 2022, the Auto Alliance claims the industry accounted for 10% of the vehicle market in December last year, and due to the accessibility of the tax credits, it most likely expanded more in the first quarter of 2023.
According to John Bozzella in a blog post, it is still unclear which electric vehicles are currently eligible for the federal credit under the new rules and which are not. Bozzella said that the most recent development will definitely reduce the pool of electric vehicles that qualify. In the foreseeable future, fewer automobiles will be eligible for the entire $7,500 tax credit.
Until now, vehicle manufacturers have been unable to persuade the U.S. government to relax the new standards, considering that the United States, Mexico and Canada currently produce only a small number of the necessary components and raw resources needed in batteries. The IRA deliberately inserted that rule to encourage a completely new local supplier base. General Motors, Ford and several other companies, including start-ups such as Redwood Materials and Sila, intend to start manufacturing anodes and cathodes for batteries domestically.
But it is likely to require up to three years before there is a greater supply of these materials, which are currently mainly imported through China.
According to Jessica Caldwell, plans to manufacture or source battery materials should not be made hastily. While vehicle producers are probably appreciative of the government’s push regarding an inexpensive transition to EVs, adherence to the new regulations could be marred by discontent and some scrambling behind closed doors.
The announcement did not offer much new information as to which electric vehicles are eligible for the tax benefit under the new regulations. Prospective buyers of models from various startups such as Workhorse Group Inc. (NASDAQ: WKHS) may need to talk to their suppliers in order to be helped to understand which applicable tax breaks they may qualify for.
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