New Clean Vehicle Tax Credit Plan Means Most EVs No Longer Qualify

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The Inflation Reduction Act of 2022 is both more inclusive and more restrictive than the present EV tax credit program. Drew Angerer/Getty Images

A far-reaching climate and energy bill that includes a dramatic makeover of the nation’s electric vehicle tax credit program has received final congressional approval and is on its way to the White House for President Biden’s signature.

The clean vehicles tax credits program in the Inflation Reduction Act of 2022 is both more inclusive and more restrictive than the present program, which offers up to $7,500 in tax credits. The new program continues the credit, but with a different rollout and eligibility requirements.

“The $7,500 credit might exist on paper, but no vehicles will qualify for this purchase over the next few years,” John Bozzella, chief executive of the Alliance for Automotive Innovation, said in a statement.  

The industry group has estimated that 70% of the electric and plug-in hybrid vehicles eligible for the existing tax credit would lose eligibility in 2023 under the measure’s tough battery content rules and vehicle price caps. 

“Nearly all of our vehicles would be ineligible for incentives” until the company’s lower-priced models are introduced several years from now, said James Chen, vice president for public policy at electric truck and SUV maker Rivian. Its initial models, while built in the U.S., start in excess of $100,000, more than 25% above the measure’s price cap for trucks. 

Rivian is looking into workarounds to credit $7,500 to customers through 2022. Justin Sullivan/Getty Images

Lots of Limits

Here are the price limits for qualified cars and trucks and income limits on buyers who want to snag the $7,500 credit:

  • Eligible cars cannot have an MSRP exceeding $55,000. The MSRPs for eligible trucks, vans and SUVs cannot exceed $80,000.
  • Income limits for buyers of new vehicles are $300,000 for those filing joint federal tax returns, $225,000 for head of household filers and $150,000 for individual filers.
  • Vehicles must be assembled in North America to be eligible, and credit applies to vehicles built after Dec. 31, 2022.

Because the battery content restrictions get even more restrictive after 2023, it’s possible that no EVs would qualify for the credit in a few years unless manufacturers adjust pricing, build North American assembly plants and find new, approved sources for their battery materials.

Here’s more on the new plan that establishes tough new restrictions on where battery materials for electrified vehicles can come from and where qualified vehicles can be assembled: 

  • An eligible vehicle’s battery must contain certain levels of critical minerals—such as lithium—that are sourced in North America or one of the countries with which the U.S. has free-trade agreements. Minimum acceptable levels start at 40%—by cost—in 2023 and increase by 10 percentage points annually until hitting 80% in 2027.
  • Eligible vehicles’ non-mineral battery components must be sourced in North American or free-trade countries, in increasing levels starting at 50% by cost in 2023 and topping out at 100% in 2029. 
The Zero Emission Transportation Association (ZETA) supports the new plan and its emphasis on local EV production and jobs. The map (above) shows where American EV jobs are based.   Zero Emission Transportation Association

More Possibilities

While the new program makes it more difficult for today’s EVs and plug-in hybrids to be eligible for the tax credit, it also increases the number of automakers whose vehicles could be eligible, and broadens the definition of the kinds of vehicles that could qualify. 

Companies like General Motors and Tesla, which hit the 200,000 sales threshold in 2018, are eligible again since it eliminates the cap. Now the credit is applied at the time of sale, not at tax time. It also sets the tax credit for all eligible new vehicles at a flat $7,500 maximum rather than basing it on battery size, as with the present program.

The program changes today’s “plug-in vehicles” credit to a more encompassing “clean vehicles” credit, opening it to fuel-cell electrics and to future alternative fuels that might compete with battery-electric power. 

It also establishes credits for used EVs and other qualifying clean vehicles—a first.

  • For used clean vehicles, the tax credit is equal to 30% of the vehicle’s price, the credit amount not to exceed $4,000.
  • Eligible used vehicles must be purchased from a dealer, must be priced at $25,000 or less, must be purchased by an individual (no businesses) and must be at least 2 years old at time of purchase.
  • Income limits are $150,000 for joint return filers, $112,500 for head of household filers and $75,000 for individual return filers. 
  • Used clean vehicles are not required to meet the new vehicles’ country-of-origin requirements.

It also specifies that buyers who have a written binding contract to purchase a qualified vehicle—executed before the new law is signed by the president—can claim a tax credit under the present program’s rules even if the vehicle won’t be delivered until the new rules take effect.

U.S.-made Lucid EVs are priced too high to qualify under the new rules. Kent Nishimura/Los Angeles Times/Getty Images

Fewer Choices

Most automakers will be impacted, at least in the first years of the program. Until a broad new North American supply and manufacturing base is established, consumers will find fewer new clean vehicles in the market that have tax credit eligibility.

The program is complex, and not all of the particulars have been worked out—the measure gives regulators until the end of 2022 to fill in the blanks. 

But it is clear that consumers interested in EVs initially will see fewer models with tax credits that lower their cost.

Their battery content might change things—but based on where they are assembled and what they are priced at, here’s which—out of 72 models eligible today—could qualify in 2023 under the new rules:

The 10-year program ends Dec. 31, 2032. By then, many industry analysts believe EVs and other clean vehicles will have reached the economy of scale needed to make them price-competitive with internal combustion engine vehicles by, or before that time and will no longer require financial incentives to appeal to consumers.

Teslas accounted for 70% of all EV sales in the U.S. in 2021 without tax credit eligibility to help it and could do even better with restored eligibility. But many Teslas are priced above the maximum established in the new program—only the Model Y small crossover and the base trim of the Model 3 sedan would be eligible.

Most of GM’s qualified vehicles, in contrast, are priced to qualify under the new rules—the hulking GMC Hummer EV and Hummer electric pickup are exceptions.

Toyota’s qualified models—including its Mirai fuel-cell sedan— all come in under the price caps, but none are assembled in North America, one of the new requirements. 

The bill passed on a vote of 220-207 along party lines. Kent Nishimura/Los Angeles Times/Getty Images

Build it Here

Supporters acknowledge that the plan initially will reduce the number of vehicles that will qualify for a tax credit—something many EV advocates believe will hamper momentum.

But the restrictions are needed, supporters say, to encourage the development of a North American EV supply chain and, ultimately, to eliminate dependence on foreign nations—especially China—for critical minerals needed to produce batteries and electric motors. 

Many of the major producers of those minerals—especially nickel, cobalt and manganese—are not approved sources under the new program, and only two of the top four lithium-producing countries are approved.

Passage of the measure allows the U.S. to achieve “…an ambitious path to emissions reduction that embraces domestic manufacturing and technological innovation that makes us all better off,” the Zero Emissions Transportation Association said in a Twitter post after the bill was narrowly approved by the Senate Aug. 7.

President Biden has said he will sign the Inflation Reduction Act, which includes the EV tax credit plan. It cleared the Senate on a 51-50 party-line vote, with the vice president casting the tie-breaking vote. The bill was approved Friday in the House on a vote of 220-207 along party lines.

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