Local Sourcing Rule Problematic for Expanded $7500 EV Tax Credit

• Tax credits in the Inflation Reduction Act would be available on SUVs, pickup trucks, and vans priced up to $80,000, and on all other body styles, including sedans like the Tesla Model 3, priced up to $55,000.

• Battery assembly plants are popping up all over the US (including at Ford's Kansas City plant pictured above), but the new legislation will make it difficult for automakers to meet North American sourcing requirements.

• But the industry consensus is that no automakers will be able to meet the tax credit requirements because there will be no lithium processing in North America any time soon.
  

The Senate on Sunday passed the Inflation Reduction Act, 51-50, with Vice President Kamala Harris breaking the tie. The $739 billion budget reconciliation bill, seen as a victory for the Biden White House and as a weapon in the November midterm elections by Republican candidates, tackles climate change and health care while setting a minimum corporate tax rate of 15%.

The climate change provisions include an extension of the $7500 tax credit that has been available to consumers of electric and electrified vehicles. Under the bill, the tax credit no longer ramps down for an automaker that has sold 200,000 EVs and/or plug-in hybrids. Under the bill, the tax credits are available until 2032, though there is a cap on sticker prices; the tax credit is available on SUVs, pickup trucks, and vans priced up to $80,000, and on all other body styles, including sedans like the Tesla Model 3, priced up to $55,000.

The bill now faces a much easier vote in the House of Representatives, likely this Friday, Aug. 12. The legislation would remove the volume limit while also placing strict minimum requirements on the portion of batteries, battery components, and most importantly, materials that come from North America in eligible vehicles, which must also be assembled in North America.

The Inflation Reduction Act requires that a vehicle “placed in service” before Jan. 1, 2024, must have 50% battery component content made in the US or one of its trade partners to qualify for the $7500 tax credit. That requirement ramps up by 10 points per year, reaching 100% North American components for calendar years 2029-32.

Battery assembly plants are popping up all over the US, so this shouldn’t be an issue, right? Here's the hard part: “Critical Mineral and Battery Component Requirements” that place North American sourcing minimums of 40% on vehicles “placed in service” before 2024 also ramp up 10 percentage points per year, topping out at 80% after Dec. 31, 2026.

As an industry insider notes, these strict provisions were key to securing the bill’s support from Democratic Sen. Joe Manchin III, because his strength among his constituents in West Virginia is his work fighting foreign mining, processing, and manufacturing interests, particularly from China.

China currently leads battery manufacturing capability with more than 75% of global production, according to The Wall Street Journal, and similarly dominates anode, cathode, and battery-cell production. That will change, with General Motors about to announce its fourth battery plant—it has one up and running and two more already announced. Toyota’s North Carolina battery plant is due to open in 2025 with capacity for 800,000 EVs, PHEVs, and hybrids, and the facility has space for another line capable of 400,000 additional units per year.

But according to the Journal’s numbers, China also dominates processing of cobalt, mostly from the Congo, lithium from Australia, manganese from South Africa, and nickel from Indonesia.

“Automakers are already moving to develop raw material and EV component operations in the US,” the Alliance of Automobile Manufacturers said in a statement released last week. “That is a process that is well under way, but it’s also a change that doesn’t happen overnight. We support (100 percent) Senator Manchin’s goal to reduce dependence on foreign nations for minerals and are committed to growing America’s EV supply chain and adding jobs and capacity here. But a likely result of this bill (as currently constructed) is that a significant number of consumers will not be able to take advantage of this credit in the early years when it is needed the most.”

Rivian, which is not an alliance member, has objected to an $80,000 sticker-price cap for the tax incentive on EV pickups, vans, and SUVs. Pricing for the all-electric 2022 Rivian R1T pickup begins at $68,575.

Though GM is part of the Alliance, CEO Mary Barra gave “support for the Inflation Reduction Act, as currently proposed,” at a White House roundtable on the bill last Thursday, Aug. 4 (where President Biden once again expressed his desire to buy a Corvette e-Ray).

“The bill will help drive further investments,” Barra continued, though conceding “some of the goals cannot be achieved overnight.” But the industry consensus, as expressed by the Alliance statement, is that no one will be able to meet the tax credit requirements because there will be no lithium processing in North America any time soon.

While the new incentives wipe out the 200,000-vehicle EV/PHEV limit, they also wipe out the old tax credit completely. Under the current system, once an automaker sells 200,000 electrified vehicles, the incentive is cut in half for six months—to $3750 for vehicles that were eligible for the maximum $7500 credit—and then the incentive is cut in half again for the second half-year after the automaker has hit the limit. When the new credit provision kicks in next year, those phase-downs will be eliminated.

Ford also has developed an aggressive program for batteries and material sourcing, but it has quite far to go. “Friendly countries that can supply these elements is the problem,” says Sam Fiorani, AutoForecast Solutions’ vice president for global vehicle forecasting.

“While the Ford Mustang Mach-E is built in Mexico with batteries assembled in Mexico and components from Argentina, the company supplying the batteries is CATL, a company based in China,” Fiorani says.

Ford has three battery assembly plants due to go on-line in the middle of the decade that would help it meet part of the tax credit requirements; two are in Kentucky and one in Tennessee.

Even with GM accepting the Inflation Reduction Act’s restrictions, the extended electrified vehicle tax credit could become the EV revolution’s “Chicken Tax,” the tariff that has largely kept foreign-built pickup trucks and commercial vans out of our market since 1964.

Are federal tax incentives important as you consider whether you can afford an electric vehicle? Please comment below.