Automakers Struggle to Understand Whether New US Bill Allows EV Tax Credits for Customers

US automakers and dealers are scrambling to figure out if they can still offer $7,500 (roughly Rs. 5,97,000) tax credits to would-be buyers of electric vehicles (EVs), as the US Congress prepares for final votes today on a bill that includes a top-to-bottom overhaul of Washington's clean vehicle policies.

Under the $430 billion (roughly Rs. 34,23,000 crore) climate, health care and tax bill that the US House of Representatives was set to vote on Friday, rules governing the current $7,500 (roughly Rs. 5,97,000) EV tax credit aimed at persuading consumers to buy the vehicles would be replaced by incentives designed to bring more battery and EV manufacturing into the US.

Manufacturers, dealers and consumers do not have answers to many basic questions about how the new rules will affect the way clean vehicles aimed at consumers - including fully electric and hybrid models - will be bought, sold and built, automakers, consultants and lobbyists said.

However, industry executives were more positive about proposed incentives of up to $40,000 (roughly Rs. 31,84,176) per vehicle for larger commercial electric vehicles, such as Tesla's Semi or electric commercial vans developed by several manufacturers.

The provisions in the Inflation Reduction Act are "a powerful tail wind in the commercial space," said RJ Scaringe, chief executive of Rivian which has an agreement to deliver up to 100,000 large vans to shareholder Amazon.

The legislation brings "a significant change in value chain requirements, in a very short period of time, that affects an industry where supply chain development ... is measured in years," said John Loehr, a managing director with consulting firm AlixPartners.

No longer eligible

The most immediate effect of the Inflation Reduction Act would be a ban on tax credits for vehicles assembled outside North America. That would mean about 70 percent of the 72 current EV and plug-in hybrids on the US market would no longer be eligible, said the Alliance for Automotive Innovation, which warned the change "will surprise and disappoint customers in the market for a new vehicle" and "jeopardize" EV sales goals.

However, US Transportation Secretary Pete Buttigieg told Reuters in an interview this week: "This is ... going to be a very important long-term transformational policy to accelerate the EV revolution and to make sure it is a 'Made in America' EV revolution."

"Industry is capable of sometimes more than they will at first see," Buttigieg added.

The Biden administration must still write and finalize implementing regulations to handle some of the complex questions raised by the quick rewrite of the tax credit.

New restrictions on battery sourcing and critical minerals, along with price caps and income caps, take effect on January 1, which will potentially make all current EVs ineligible for the full $7,500 (roughly Rs. 5,97,000) credit.

A Congressional Budget Office forecast estimated as few as 11,000 EVs may qualify for the tax credit in 2023.

The domestic content requirements ratchet up over the next six years.

Volvo Car North America said just one of its models that currently qualify for EV tax credits will still qualify after the bill is signed. The only one in the short term that will qualify is the S60 Recharge, that is assembled in South Carolina, and even that may not qualify after January 1.

Several automakers, including startups Rivian and Fisker, this week began urging would-be customers to get off the fence and commit to buying vehicles before the current rules are replaced.

Binding contract

The bill does allow consumers to still get the credit if they buy before Biden signs the bill into law, but must have a "written binding contract" to purchase.

Rivian encouraged would-be buyers in a letter to make $100 (roughly Rs. 7,900) of their deposits non-refundable in order to qualify for the credit. Rivian executives said Thursday customers are ordering R1 trucks and SUVs with average prices of $93,000 (roughly Rs. 74,03,200) - well above the cut-offs in the proposal before the House.

"We cannot guarantee that the IRS (Internal Revenue Service) will approve tax credit eligibility as we interpret the terms of the Inflation Reduction Act," Rivian cautioned in its letter.

Mercedes-Benz said it is "reviewing the proposal in anticipation of the new provisions becoming final in the coming week."

European Union and South Korean government officials on Thursday said they were concerned the domestic content and manufacturing requirements in the Inflation Reduction Act could violate World Trade Organization rules.

US electric vehicle market leader Tesla and General Motors already sell their EVs without a federal tax credit, because they hit the 200,000 vehicle cap under the current law.

Tesla and GM may not become eligible to offer tax credits under the new law until Jan. 1. And even then, it is not clear which models - if any - will get the full $7,500 (roughly Rs. 5,97,000) by meeting requirements that 40 percent of battery minerals come only from North America, or countries with which the US has free trade agreements.

The proposed subsidy limits would hit hardest on automakers and battery makers with corporate parents in China.

Starting in 2024, rules will take effect that make vehicles ineligible for any credit if they have content from a "foreign entity of concern," a term that could include Chinese firms.

© Thomson Reuters 2022