Electric Vehicle Tax Incentives For Consumers And U.S. Automakers

The Inflation Reduction Act (IRA) is the most significant climate legislation in United States history. Energy Innovation Policy and Technology LLC® modeling finds the IRA’s $370 billion in climate and clean energy investments could cut U.S. greenhouse gas (GHG) emissions up to 43% below 2005 levels by 2030.

Combined with state action and forthcoming federal regulations, the IRA puts the United States within reach of its Paris Agreement commitment to cut emissions 50% to 52% by 2030. The IRA will strengthen the U.S. economy by creating up to 1.3 million new jobs and avoid nearly 4,500 premature deaths annually by reducing air pollution, both in 2030.

In this series, Energy Innovation® analysts showcase the IRA’s benefits in the power, buildings, and transportation sectors of the U.S. economy. This article details IRA investments in the transportation sector.

Transportation is the country’s largest source of GHG emissions, and electric vehicles (EVs) are the fastest way to reverse that trend. The IRA’s new EV incentives can accelerate the shift away from dirty combustion engines while unlocking consumer savings, onshoring manufacturing jobs, securing America’s clean energy supply chain, and cleaning the air in our most pollution-burdened communities.

Paving the way for clean transportation

Prior to the IRA’s passage, the U.S. EV market faced serious roadblocks. Long-standing tax credits were slated to expire, and popular automakers like Tesla
TSLA
and GM had already met or were quickly approaching the 200,000-vehicle sales cap—blocking customers from taking advantage of the tax credit. Incentives for commercial or used EVs didn’t exist and the credit couldn’t be applied at the point of purchase, meaning only a small fraction of consumers were benefitting.

Supply chain challenges were also causing vehicle shortages and long wait times, along with serious national security concerns because foreign markets control most of the EV supply chain and critical minerals, and most EV models are manufactured overseas.

The IRA addresses U.S. EV market shortcomings head on, laying the foundation for a more sustainable, equitable, and secure transportation future. And investing in a more diverse global EV supply chain will lower battery costs and help people worldwide plug into clean transportation.

EV incentives in the IRA will undoubtedly mean big changes for consumers, the auto industry, and the economy. While the billion-dollar question now becomes how quickly the market will adapt, the IRA’s 10-year time span finally creates stability the U.S. EV market has lacked.

The suite of clean transportation provisions will shift the domestic EV market into high gear, help millions more Americans benefit from clean transportation, bolster national security, increase economic competitiveness, and create homegrown jobs for decades.

A more secure domestic EV supply chain

The minute President Biden signed the IRA, a big change to the longstanding EV incentive immediately went into effect: Now, only passenger vehicles assembled in North America qualify for the $7,500 federal EV tax incentive, leaving approximately 30 models eligible. Although 10 of those models have already met the manufacturers cap, the IRA lifts that cap starting January 1, 2023.

The IRA also rectifies the domestic battery and critical mineral production shortfall with new material and vehicle component standards. Instead of locking in our reliance on outsourced mining and manufacturing for another decade, the IRA makes eligibility for the full $7,500 incentive contingent on two new requirements (with each valued at $3,750):

Materials. Critical minerals used in EV batteries must meet a gradually increasing percentage of components extracted, processed, or recycled in North America or in countries that have free trade agreements with the U.S., starting at 40% in 2023 and increasing by 10% each year, up to 80% in 2026. Starting in 2025, vehicles will not qualify for the tax credit if the battery’s critical minerals were extracted, processed, or recycled by a “foreign entity of concern,” which encompasses specifically designated nations and organizations owned by, controlled by, or under the jurisdiction of such nations.

Components. An EV battery’s components must be manufactured or assembled in North America—50% beginning in 2023, increasing by 10% each year, up to 100% in 2028. Starting in 2024, vehicles will not qualify if the battery components were manufactured or assembled by a foreign entity of concern.

Challenges and opportunities for U.S. automakers

The IRA’s new battery and critical mineral standards raise important questions for the U.S. auto industry. Which vehicles will be eligible for the incentive in the next five years? How will auto dealers reorient their business model around qualifying cars? And most significantly, how quickly will U.S. automakers transform their industry and build a new domestic supply chain?

The IRA’s designers intentionally set stretch goals for U.S. automakers, and the new qualifications will transform America’s economy. But the IRA gives them tools to succeed, including battery manufacturing and critical mineral production incentives, investment tax credits for manufacturing EVs, $2 billion in grants to revamp existing manufacturing facilities, and $500 million for enhanced use of the Defense Production Act.

U.S. automakers and EV supply manufacturers have a historic opportunity to regain global competitiveness and safeguard national security, while also supporting new, homegrown, well-paying manufacturing jobs.

Boosting domestic mining for the five critical EV minerals (lithium, cobalt, nickel, manganese, and graphite) will also require retooling the U.S. mining industry to minimize impacts to communities and the environment.

Creating a more equitable and sustainable EV market

In addition to creating a competitive and secure domestic EV industry, IRA provisions will boost long-term equitable EV growth, helping more Americans benefit from transportation electrification. EVs are cheaper to own than their gas counterparts, but until now many lower or middle-income households had trouble affording an EV that could save them hundreds of dollars at the pump. The IRA’s equitable incentive design slashes those upfront costs, making EVs more affordable and their savings more accessible.

First, it removes the arbitrary 200,000 vehicle-per-manufacturer cap. Several U.S. manufacturers had already maxed out, but lifting the cap means many popular and affordable EVs will once again qualify for the tax credit, helping attract new buyers and sell more vehicles.

Second, starting in 2024, the law allows car buyers to transfer the credit to dealers at the point of sale. Since upfront purchase price is a primary consumer motivator, impacting the amount you owe and lowering finance costs, point-of-sale incentives make EVs the more attractive purchase. Energy Innovation modeling shows this new incentive feature will make most new EVs cheaper right off the lot, giving mid-range priced American-made vehicles an advantage.

Smart EV incentive design also ensures taxpayer dollars don’t subsidize luxury vehicles and gives the credit to those who need it most. Only sedans under $55,000 and SUVs and vans under $80,000 will qualify, and buyers will be subject to annual adjusted gross income caps of $150,000 for individuals, $225,000 for head of household, or $300,000 for a joint household.

Third, for the first time ever, the IRA provides a used EV tax credit for 30% of the sale price up to $4,000 (sale price must not exceed $25,000)—transformative since used vehicles make up more than a quarter of annual U.S. vehicle sales. Used EVs are also not subject to any manufacturing, materials, or components requirements. Income caps of $75,000 for individuals, $112,500 for head of household, or $150,000 for a joint household, will mean more low- and moderate-income consumers benefit from the tax credit.

The new used EV tax credit will also boost auto dealerships specializing in used vehicle sales, and giving used EVs a new lease on life will reduce demand for new materials and components. Thanks to the IRA, used EVs will be hotter than ever in the coming decade, yielding considerable consumer savings.

Fourth, the IRA taps the untapped market for commercial EVs and fleets by creating a new 30% commercial EV tax credit (up to $7,500 for smaller vehicles less than 14,000 pounds, and up to $40,000 for vehicles weighing more than 14,000 pounds). This tax credit will help fleet operators electrify the over 8 million commercial vehicles and trucks used in fleets in the U.S. today, and will save businesses and truck drivers money.

Medium and heavy-duty commercial vehicles are the largest contributors to harmful NOx emissions (a precursor to smog and soot) and are responsible for about 25% of the transportation sector’s carbon dioxide emissions. Scaling the nascent commercial EV market will deliver enormous climate and public health benefits, with communities adversely impacted by truck traffic and harmful diesel pollution benefiting most from the uptake of clean commercial vehicles.

The IRA beckons the U.S. auto industry to meet the moment

The IRA’s EV incentives require the U.S. auto industry to do some swift retooling. Decades of overreliance on foreign materials, components, and processes has put American industry and consumers at a disadvantage, vulnerable to disruptions and fossil fuel price spikes.

Shifting gears will take some doing, but the industry has done it before. During WWII, the U.S. auto industry stepped up to build the tools and equipment needed to defeat dictators. Just two years ago, they pivoted quickly to produce masks and ventilators to combat the COVID-19 pandemic and save lives. Today, the urgency of the climate crisis and other national security threats beckon the industry to, once again, meet the moment.

The IRA’s EV provisions will reinvigorate our auto industry, support good-paying jobs, and bring clean transportation to low-income households and communities. And now, our domestic climate goals will better align with our national security priorities and global economic competitiveness objectives.

Nicole Lewis

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