The $7,500 tax credit to buy an electric car is about to change yet again

A tax credit of up to $7,500 to buy an electric car is about to undergo a major change — again.

The Inflation Reduction Act, a major climate law passed last summer, dramatically reworked an existing tax credit for electric vehicle purchases. The credits are intended to make electric vehicles cheaper, and hence more appealing, part of the administration's plan to fight climate change.

Updated March 31, 2023 at 11:01 AM ET

But the complex rules are also designed to incentivize U.S.-based production, to build up a domestic clean-vehicle supply chain and reduce reliance on China.

In the short term, those goals are in tension. After all, if the only goal were to increase electric car sales it would be easier to do it without any limitations on production.

Those tensions are coming to the fore again as the White House prepares to belatedly implement a key rule of the IRA: A requirement that a certain percentage of battery minerals and components be sourced from North America or a U.S. trade partner.

The Treasury Department outlined on Friday how it plans to walk this tightrope and implement those sourcing requirements — essentially, issuing technical guidance on how carmakers can determine if their cars qualify.

On April 18, the Internal Revenue Service will release an updated list of which vehicles are still eligible for the tax credit, based on the new guidance.

And the saga's not over: The Treasury Department still has not clarified how it will apply other requirements that kick in starting in 2024.

Yes, the rules are complicated

The battery sourcing requirements were a provision included in the IRA, but they had essentially been put on pause as the IRS tried to figure out the details of how to implement them. Now they are likely to make EV tax credits even more confusing, at a time when car shoppers and companies had already been frustrated for months about the law's complexity.

There are other limits that were added in last year's climate law, and are already in effect. Only SUVs under $80,000 and cars under $55,000 qualify, and they have to be built in North America. There's also an income cap for buyers ($150,000 adjusted gross income, for an individual).

Those restrictions are not nearly as arduous to meet as the battery sourcing requirements.

That's because the supply chain for EV batteries has historically been dominated by China, and while companies are racing to build mines and battery plants in the U.S., it will take years for those efforts to pay off. The minerals and components needed for batteries are simply not yet made in large quantities in the U.S.

As a result, it is all but certain that many vehicles that are currently eligible for the full $7,500 will not be able to meet the new sourcing standards, and see the credit cut in half or eliminated, effective immediately.

A senior administration official acknowledged that the rules "will reduce the number of electric vehicles currently eligible for the full credits in the short term," but argued it would pay off through an increase in U.S. production over the next decade.

The White House also noted that the federal government is providing other incentives for EVs and domestic manufacturing, from charging infrastructure to grants, loans and other tax credits.

John Bozzella, the head of the auto manufacturer's trade group the Alliance for Automotive Innovation, says he expects some vehicles will at least qualify for a partial $3,750 tax credit.

He also indicated that automakers are relatively pleased with how the Treasury Department approached these regulations. "Given the constraints of the legislation, Treasury's done as well as it could to produce rules that meet the statute and reflect the current market," he wrote on Friday.

Disputes over timelines and definitions

The supply chain-focused requirements were added at the behest of the influential Sen. Joe Manchin from West Virginia, a critical Democratic vote in a closely divided Senate.

Manchin has publicly expressed frustration with the Biden administration's implementation of the EV tax credits, including the fact that the credits have been available for the last three months without the government enforcing the battery sourcing requirements.

He was also frustrated that the Treasury Department interpreted the restrictions as only applying to vehicle purchases (leased vehicles can get an EV tax credit without any income caps, price caps or sourcing requirements).

For the battery sourcing guidelines, the exact definition of terms has been the subject of fierce debate in recent months, with automakers, mining companies, battery-makers, the Biden administration and Manchin all taking positions on things like the meaning of "processing" versus "manufacturing," a significant distinction in these tax credits.

Before the release of the requirements, Manchin had told reporters he was willing to go to court if Treasury attempted to "liberalize" the rules with more relaxed standards than the law had intended.

And on Friday, Manchin responded to the Treasury's release of the guidelines with a blistering press release, saying the new guidance "completely ignores the intent" of the law he helped craft, while calling it "a pathetic excuse to spend more taxpayer dollars as quickly as possible."

Another major question centers on a requirement that would essentially prohibit automakers from sourcing Chinese battery components if they want customers to get the tax credit.

Treasury has not offered any guidance on how it will implement that rule, scheduled to go into effect next year.

One thing, at least, is clear about these rules: They're going to change again. [Copyright 2023 NPR]