How does the new EV tax credit affect everyone?
CNBC recently covered an intense discussion between the United States and South Korea over electric vehicle tax credits. The issue is more complex than it appears. With vehicle prices rising due to inflation and chip shortages blocking supply lines, electric vehicles are struggling to hit the mainstream when they’re needed most. And many large automakers such as General Motors and Toyota are running out of an allowance of government tax credits for selling EVs. Electric vehicle prices could go higher or be uneven between automakers, just as consumers are starting to adopt an all-electric way of life. What does this mean for the future of EV tax credits?
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How do EV tax credits work?
EV tax credits were an idea for making electric vehicles more affordable. In doing so, consumers would have an easier time switching over from polluting combustion-engine vehicles. This was helpful, for example, in getting the price of early EVs like the Toyota Prius down to a level the average buyer could afford.
As time goes on, EVs become more mainstream and efficient to produce. Batteries become cheaper to make and will run with longer ranges without being so expensive or bulky to produce. But building a new industry with new technology takes a lot of research and development costs upfront. Therefore, the government helps companies make vehicles more affordable. In turn, this allows more companies to take the financial risk of investing in electric cars.
The international debate
Under the recently passed Inflation Reduction Act, South Korean officials are working with the U.S. government to adjust restrictive regulations on electric vehicles. The ambassador of the Republic of Korea to the U.S., Cho Tae-yong, said that officials are working on “several possible options” to correct what the country views as unfair policies toward EVs. The rules under the Inflation Reduction Act require plug-in electric vehicles to be produced in North America to qualify for tax incentives.
Is it just a boon to American manufacturing? Well, not in this day and age. The auto industry is now a complex, multinational industry in which even a single car would often be produced in multiple countries. While it might help American manufacturing jobs in spots to require EVs to be made in the U.S., this throws supply and manufacturing chains, not to mention international business relations, into a tailspin.
And the losers aren’t going to be the manufacturers in the long run. They can adjust their production lines where necessary. End consumers will have to pay full price for EVs unless and until manufacturers pull the production of EVs fully back into the United States. That may not even be feasible in today’s business environment. So an initiative that aims to boost American jobs and manufacturing may end up hurting American car makers as well as automakers overseas with no winners.
The future of EV tax credits
Hyundai and Kia are the second largest sellers of EVs in the U.S. behind Tesla. As South Korea has a free trade agreement with the U.S., these automakers are contending that the IRA is unfair. They are working with the U.S. government to find a solution that is fair to all parties. One of the problems with changing regulations at a government level with immediate effect is that automakers need time to change where their EVs are made. For example, Hyundai’s vehicles wouldn’t be eligible for U.S. tax credits until 2026 when their joint venture battery plant in the U.S. comes online.
There is a reason for the rules, however. The IRA is intent on loosening the U.S.’s dependency on China for battery materials and parts. State of Michigan Governor Gretchen Whitmer also recently instated a new bill that would allow manufacturing of EV microchips needed for vehicle production to come home to the U.S. so shortages from China will no longer hamper automakers getting EVs on the road.
This is a battle that has three fronts. First, American manufacturing might. If chip manufacturing comes home to the U.S. from China, it could turn the U.S. and Michigan specifically into a microchip supply hub, boosting high-tech and manufacturing jobs. Second, consumers need price relief in order to buy into EVs, which is going to take some negotiating to make work. And third, as governments battle over control of the future of clean energy and manufacturing for a sustainable future, we hope the losers won’t be the worker and the end consumer.
Here’s what EV consumers can expect
EV tax credits are currently designed so that you, the consumer, can save up to $7,500 on the purchase of an EV. That’s enough chunk of change that most people could consider an EV if it’s reasonably priced. There are some complicating factors that prevent all automakers from offering tax credits on EVs. One we mentioned above, there is a limited number the government will subsidize. Moreover, some automakers who sold EVs early are running out. The rule is this: once an automaker has sold over 200,000 EVs since January 2010, the phaseout schedule of their EV tax credits begins, in which they can offer fewer and fewer tax credits until they are gone.
Second, there are now rules about when you take possession of a vehicle. You had to have entered a written contract to purchase a vehicle before August 16, 2022, to qualify for the old rules for EV tax credits. If you purchase and take possession of a vehicle between August 16, 2022, and January 1, 2023, the final assembly of the vehicle has to have taken place in North America to qualify.
Basically, there are different rules for different cars and for different purchase times, which can be confusing. You can learn more at FuelEconomy.gov about which vehicles have which tax credit available. They are presented in a handy list by vehicle model and year along with the amount of tax credit each vehicle qualifies for. There are also requirements for which types of EVs already qualify even before 2023, which you can read up on there.