The United States government has introduced new tax credit rules for electric vehicles (EVs), with American automakers expected to benefit the most. The new rules, which came into effect last Tuesday, mean only 10 vehicles will initially qualify for tax credits of $7,500, which is less than a quarter of the battery-powered cars available in the United States. However, those 10 include many of the most popular models, accounting for two-thirds of EV sales before the new rules took effect.
American car manufacturers like Tesla and General Motors (GM) will benefit most from the rules, while foreign carmakers such as Hyundai will be at a significant disadvantage due to restrictions aimed at cutting China out of the supply chain. Tesla’s Model 3 and Model Y, the best-selling EVs in the United States, will qualify for the full $7,500 credit, except for the least expensive version of the Model 3. The latter will only qualify for half the credit because its battery is made in China. GM’s Chevrolet Bolt, one of the cheapest EVs on the market, will also qualify, as will SUVs and pickups the company plans to begin selling this year.
Home Field Advantage
Fewer Ford vehicles will qualify for the full $7,500 credit due to rules requiring a certain percentage of battery components and minerals like lithium to come from either domestic sources or trade allies. Ford’s Mustang Mach-E, the third-best-selling EV in the United States last year, will only be eligible for half the credit because its Polish-made battery does not meet domestic sourcing requirements. However, the F-150 Lightning pickup will continue to qualify for the full credit. Chrysler and Jeep, divisions of Stellantis, do not yet sell cars that run solely on batteries, but several of their hybrid models will qualify for at least some of the credit.
The rules give US carmakers at least a temporary advantage over competitors like Toyota, Volkswagen, and Nissan. No foreign automakers were on the Treasury list, which is expected to grow as companies adjust their supply chains. Carmakers that qualify for the tax credits will now have a head start as sales of EVs take off, causing a multiplier effect in the market. Paul Jacobson, GM’s chief financial officer, told reporters in New York that the rules are “very consistent with the strategy that we had already adopted.”
The Act
The new tax credit rules were introduced under the Inflation Reduction Act, which Democrats passed last year to fight climate change and encourage domestic manufacturing among other things. The Treasury Department was responsible for writing regulations based on the legislation. The law seeks to reduce the auto industry’s reliance on China, which makes most of the world’s batteries and dominates the processing of raw materials. It also establishes limits on sales prices and excludes individuals who earn more than $150,000 a year and couples who make more than $300,000. The rules also exclude vehicles made outside North America, including in allied countries like South Korea and Germany. Hyundai is investing $10 billion to build car and battery plants in Georgia, allowing the company to meet the Inflation Reduction Act requirements but not for several years.
Officials at the automaker and the South Korean government asked the Biden administration to allow Hyundai and Kia cars to qualify for credits while the factories were under construction, but were told that the law did not allow such an exception. The Hyundai car factory in Georgia is expected to begin producing cars in 2025, while the battery plant, which Hyundai is building with SK On, will start production in 2026.