The changes listed above will help expand the incentive effect of the EV tax credit over time and across different groups of individuals. However, other changes to the program, as listed in the IRA, may limit the accessibility of the credit.
Household Income
Prior to the IRA, any household would have been eligible for the EV tax credit. This broad eligibility led to the incentives being regressive, in that higher-income earners have tended to claim these credits to a greater degree than lower-income earners. However, high-income households are not the ones that most need the financial support in purchasing a vehicle. My Resources for the Future colleague Josh Linn has pointed out that imposing income caps on the credits would help to more effectively target these policies at individuals and households for whom the credit would more likely make or break their decision to buy an EV.
The IRA would do exactly that: Tax credits would now be limited to households making no more than $300,000. For single-filing taxpayers, the income limit is now $150,000. And for the used-vehicle tax credit, the limit is more stringent: aggregate household income cannot exceed $150,000. These income limits help make the tax credits more economically progressive by preventing higher-earning households from taking advantage of the incentive.
Vehicle Purchase Price
To further ensure that the tax credits are going to those who really need the incentive, the IRA would restrict the tax credit for high-priced EVs. Specifically, car buyers are unable to take advantage of the incentive if they want to purchase a car that costs more than $55,000, or an SUV, van, or truck above $80,000. This new provision results in many vehicle models being excluded from the tax credit, as the average new EV purchase price was over $56,000 in November 2021. Given the current challenges in the EV supply chain, EV market prices may continue to rise in the short term, thereby further reducing the number of eligible models during the next couple of years.
Vehicle Imports
In an effort to ensure that the tax credits boost the domestic manufacturing of vehicles, the IRA would exclude imported vehicles from the incentive. But this rule applies in some counterintuitive ways: Some foreign companies, such as Toyota and Honda, use domestic manufacturing to build a substantial portion of their vehicles sold in the United States. In fact, 70 percent of Toyota vehicles sold in the United States are manufactured in North America. Conversely, some US-branded companies, including Dodge, Ford, Buick, Chrysler, Jeep, and General Motors, build a portion of their vehicles in other countries. For example, the Jeep Renegade is built in Italy, Brazil, and China, with mostly foreign parts. For the purposes of the tax credit, the IRA would treat these US-owned—but foreign-built—models as imported vehicles that are not eligible for the tax credit. Conversely, foreign-owned models built in North America would be eligible.
Batteries and Critical Minerals
An EV battery contains various critical minerals, including copper, nickel, and lithium, the large majority of which the United States imports from countries such as China, Brazil, Chile, Australia, and South Africa. Only a small fraction of these critical minerals are extracted in the United States, and Australia, Chile, and China produce most of the lithium required for battery production. The reasons for this reliance on foreign resources include limited domestic reserves (currently, only one operational lithium mine exists in the United States), high costs of extraction, and concerns over the environmental impacts of mining on US communities.
The fact that US EV supply chains primarily depend on imports of critical minerals and batteries poses a significant challenge to the IRA’s EV tax credits as written. The legislation disallows tax credits for vehicles with a majority of battery components and bodies that are imported (or, crucially, imported from “foreign entities of concern,” such as China), but most battery manufacturing happens overseas. China alone hosts 80 percent of the world’s manufacturing facilities for lithium-ion batteries; the United States hosts only 5.5 percent. This requirement in the IRA reflects the federal government’s desire to encourage domestic manufacturing, mining, and recycling—and reduce reliance on countries where the United States has geopolitical concerns.
Specifically, the bill requires a percentage of the battery’s minerals and manufactured parts to be produced domestically (or by countries with fair-trade agreements, such as Chile and Australia), and increases that percentage every year—starting at 40 percent in 2023 and quickly ramping up to 80 percent in 2026. At the moment, most manufacturers do not have batteries that meet this requirement. In a recent joint venture, however, General Motors and LG Electronics created Ultium Cells, a company that will mass-produce batteries in the United States. Three manufacturing plants will be online by 2024, and these batteries use only a fraction of the cobalt generally required in EV batteries. Furthermore, in the spring of 2022, General Motors entered into a multi-year cobalt-purchasing agreement with Glencore, which sources cobalt from Australia, one of the countries listed in the US fair-trade agreement.
Requiring manufacturers to import their minerals and battery parts from fair-trade countries likely will congest supply chains and drive up some costs in the near term, at least until domestic battery-manufacturing plants are built and contracts with fair-trade countries have been finalized. Whether these short-term effects may cause the price of the resulting EVs to exceed the cost thresholds set in place by the IRA remains an open question.
What’s the Verdict?