3 issues to watch on EVs and tax breaks

By David Ferris, David Iaconangelo | 04/03/2023 06:48 AM EDT

The IRS has been facing a major decision over electric vehicles. U.S. consumers and automakers are still looking for answers after new tax guidance came out last week.

Workers assemble electric vehicles at a plant in Hamtramck, Michigan.

Workers assemble electric vehicles at a plant in Hamtramck, Mich. Bill Pugliano/Getty Images

The Biden administration sought to provide firmer ground for electric vehicle buyers and manufacturers last week when it issued new tax rules, but unresolved questions could still scramble which cars qualify for breaks in the years ahead.

The IRS was facing a heavy lift when it issued the rules Friday, intending to help clarify a high-profile piece of the Inflation Reduction Act that Congress passed last year.

Uncertainty surrounds eligibility for a $7,500 EV rebate.


Besides reducing America’s carbon emissions by rewarding consumers for buying EVs, the goal of the tax credits is to move EV supply chains out of China and stimulate a new U.S. battery industry. And since the bill was signed into law last August, other aims have entered the mix, such as extending the EV supply chain into allied regions like Japan and Europe, which the bill originally excluded.

The tax credit touches not just Americans’ wallets but also the enormous auto industry and the United States’ relationships around the world.

“Undoubtedly, there’s going to continue to be some questions,” said Jennifer Safavian, the president of Autos Drive America, a trade group of foreign automakers that manufacture vehicles in the United States.

Here are three questions that still need to be answered.

When will EV buyers get breaks?

More clarity in government rules doesn’t get automakers all that much closer to answering the question on every consumer’s mind: When do I get a discount on the car I want?

For customers, the answer is likely longer than they want to wait, and for less of a discount than they might expect. Automakers are suggesting that the IRS’s rules will mean fewer discounted EV models for the foreseeable future (Greenwire, March 31).

For those models that do earn a credit, it may be for only half of the full $7,500 the government said it would offer. That’s because of how the credit is divvied. Half the credit is given for sourcing the components of the battery in North America, and half is for summoning the battery’s critical minerals from the United States or an allied country.

The first part — the assembly part — is likely to arrive first because it’s easier to accomplish. That could provide a discount of $3,750 off the sticker price.

The other $3,750 related to critical minerals could be a lot further off because the auto industry is still in the early stages of understanding supply chains and how it must alter them to qualify for the tax credit.

“A lot of this credit will be very difficult for the automakers to meet,” said Arun Kumar, a partner in the auto practice at AlixPartners, a global consulting firm.

Few automakers have ventured to say whether their vehicles will qualify for the credit after the new rules go into effect April 18.

One exception is General Motors Co., which said Friday that some of its EVs — the Cadillac Lyriq and the electric versions of the upcoming Chevrolet Equinox and Blazer SUVs — will “qualify for the full $7,500 credit in 2023.” The company made no mention of tax credits for its current EV bestseller, the Chevy Bolt.

Automakers also have a lot at stake as they sort through their supply chains. They must balance the money they might lose by dialing down their sourcing from China — the most common and low-cost supplier — against how much they have to gain by getting brisk sales because of the tax credit.

“That will have a big impact on my profitability,” Kumar said, putting himself in the position of an automaker.

Making the calculus tougher for carmakers are the tax credits’ moving targets. To earn the credits, an automaker must source 40 percent of the value of the critical minerals in the battery from the U.S. or an allied country. The bar then goes up 10 percent a year until reaching a plateau of 80 percent in 2027.

“If they can hit the 2023 number, then they’ve got to hit the 2024 number, and then they’ve got to hit the 2025 number,” said Nick Nigro, the founder of Atlas Public Policy, an EV consultancy. “They are targeting the endgame now so they can meet the percentage levels in the next few years.”

It’s a lot for industry executives to wrap their heads around, and the uncertainty will likely translate into impatient or confused customers.

“All the automakers are figuring out how to do this, and it can’t happen overnight,” Safavian said.

Where will China fit?

The Treasury Department, which oversees the IRS, chose to delay guidance on one element of the Inflation Reduction Act that could have sweeping consequences for Chinese companies, which produce most of the world’s batteries for electric vehicles. The “foreign entity of concern” provision will take tax credits off the table for any model of electric vehicle that uses battery parts or critical minerals made by a company “owned by, controlled by, or subject to the jurisdiction or direction” of China and other rival nations.

That tax credit exemption will go into effect in 2024 whenever an EV’s battery components are manufactured or assembled by a foreign entity of concern. In 2025, the law will extend to the extraction, processing and recycling of the car’s critical minerals.

Automakers and electric vehicle advocates had asked Treasury to clarify which types of companies would be disqualified under the law’s definitions. Analysts say the law could be interpreted as excluding Chinese companies from virtually any role in the supply chain for subsidized EVs (Energywire, March 24).

Treasury steered clear of the issue in the proposed guidance, while promising that its foreign entity rules “will be addressed in future guidance.”

That left unanswered questions about the fate of major partnerships planned between U.S. car companies and Chinese miners and battery purveyors.

The most high-profile example involves Ford Motor Co. The carmaker announced in February it would build a $3.5 billion battery plant in Michigan while licensing technology from China-based Contemporary Amperex Technology Co. Ltd. (CATL).

Republicans in Congress, along with Sen. Joe Manchin (D-W.Va.), have blasted that partnership, despite Ford’s assurances that its terms would not direct federal subsidies to CATL.

Sen. Marco Rubio (R-Fla.) has urged the Biden administration to ensure that CATL and other Chinese companies do not benefit “directly or indirectly” from the Inflation Reduction Act tax credits and filed legislation that would broaden the law’s disqualifications for foreign entities of concern.

Conservative discontent of that kind is likely to go on simmering after the IRS guidance on EVs. On Friday, Rubio’s office issued a statement saying the guidance “does nothing to change the failed status quo.”

Other major automakers may follow in Ford’s footsteps with partnerships that could hinge on Treasury’s foreign entity interpretation.

Tesla Inc. is exploring a licensing deal with CATL to build a battery factory in Texas and recently sent representatives to meet with White House officials to discuss the deal, according to a report from Bloomberg News. The White House did not answer E&E News inquiries about the report.

On Thursday, Ford also announced a three-company collaboration with Zhejiang Huayou Cobalt Co. — a China-based mineral supplier — and Indonesia-based PT Vale Indonesia Tbk. Under the deal, all three companies are co-investing in a new plant in Indonesia that will process nickel into a material for battery cathodes, according to a news release from Ford.

Melissa Miller, a Ford spokesperson, said the company did not know if electric cars that incorporate that source of nickel would qualify for the EV tax credits, “particularly as it’s not yet known how Indonesia will be treated by additional Treasury action.”

“However, we are confident this project will help make electric vehicle batteries even more affordable for even more customers,” she wrote in an email in reference to the Indonesian plant.

Observers have said the proposed guidance did little to clarify China’s role as a future source of EV batteries. Treasury is “kicking the can on foreign entities of concern,” wrote analysts from ClearView Energy Partners in a research note Friday.

Will the rules change?

While the federal government tried last week to reassure car buyers and the auto industry that new rules are here to stay, several factors loom over the situation.

For starters, these are just proposed rules. The final rules will be issued after a comment period that ends in June. That gives companies, foreign countries and advocacy groups another three months to pressure the IRS and the Biden administration to swing details of the rules in their favor.

Second, a new, stiffer interpretation of the rules is coming.

In its guidance last week, the IRS described its current regime as “transition rules” and that by 2025, the tax authorities “anticipate moving to a more stringent test.”

No one yet knows what that looks like. “I don’t know what that means,” Safavian said.

A third variable is Congress.

Manchin, who played a key role in drafting the EV tax credit portion of the Inflation Reduction Act, has recently been the most vocal critic of how it’s being implemented (Greenwire, March 31).

But he isn’t the only one.

Representatives on both sides of the aisle have taken issue with how the Biden administration has attempted to broaden the number of countries that can provide critical minerals and allow automakers to claim the tax credit.

Last week, the Biden administration announced a new trade agreement with Japan. The White House said the accord — which covers five minerals critical to batteries — falls under President Joe Biden’s authority as an executive order.

But that has drawn protests both from Republicans like Nebraska Rep. Adrian Smith, chair of the House Ways and Means Subcommittee on Trade, and Democrats like Oregon Sen. Ron Wyden, head of the Senate Finance Committee, and Massachusetts Rep. Richard Neal, the ranking member of the Ways and Means Committee.

A final question is whether the rules will be challenged in court. Controversial regulations often are. For his part, Manchin said he is ready to do so. “I’m willing to go to court,” he said at an event last week. “I’m willing to stop it all” (E&E Daily, March 30).

On Sunday, the senator appeared on CNN and spoke about EV-related manufacturing. Manchin said it’s “ridiculous for us to move rapidly into a transportation mode that we do not have the ability to supply [ourselves] or with reliable supply chains.”

When asked about a possible lawsuit against the Biden administration, Manchin told CNN he was looking at every option to make sure the Inflation Reduction Act is implemented as intended.

It is not clear how Manchin might follow through on his threat.

As a member of Congress, Manchin does not have personal standing to wage such a lawsuit based on a past Supreme Court decision, according to Pat Parenteau, a law professor at the University of Vermont. Only the Senate or House as an institution would have standing to sue, he said. Instead, Parenteau said Manchin could file an amicus brief saying that the law he wrote is being misinterpreted, but that wouldn’t carry as much weight as a lawsuit.

Put together, the conflicts send shivers through a tax credit structure that the Biden administration wants car buyers and automakers to be able to count on.

“It’s blurred because of some of the objections we’re seeking from Capitol Hill and from some in the industry,” said Levi McAllister, a lawyer who handles EV-related work at the law firm Morgan Lewis. “We don’t know if there’s going to be a legal challenge.

“We don’t know how this is all going to end.”

Reporter Hannah Northey contributed.