The NEW New Tax Credits for EVs
What:
Congress recently approved and passed the Inflation Reduction Act into law. Inside that law, is the details of the new tax credit. Let's put aside that the name does NOT match what's inside. If we wanted to reduce inflation, we would stop digitally printing money. Ok, moving on.
The biggest differences between the old tax credit and the new tax credit are:
OLD:
"for the purchase of a new qualified EV that draws propulsion using a traction battery that has at least four kilowatt-hours (kWh) of capacity, uses an external source of energy to recharge the battery, has a gross vehicle weight rating of up to 14,000 pounds, and meets specified emission standards. The minimum credit amount is $2,500, and the credit may be up to $7,500 based on each vehicle’s traction battery capacity and the gross vehicle weight rating....The credit will begin to be phased out for each manufacturer in the second quarter following the calendar quarter in which a minimum of 200,000 qualified PEVs have been sold by that manufacturer."
In this scenario, nearly every EV sold on the market has at least a 4kWh battery -- in fact they usually have at least 60kWh up to 100 kWh -- and would qualify for the full $7,500.
And, the credit expires once a manufacturer has sold over 200,000 units. That's why in the old scheme, you didnt get any of these tax credits with a Tesla. They've well exceeded that volume.
NEW:
"Beginning January 1, 2023, the Clean Vehicle Credit provisions remove manufacturer sales caps, expand the scope of eligible vehicles to include both EVs and FCEVs, require a traction battery that has at least seven kilowatt-hours (kWh), and establish criteria for a vehicle to be considered eligible that involve sourcing requirements for critical mineral extraction, processing, and recycling and battery component manufacturing and assembly. Vehicles that meet critical mineral requirements are eligible for $3,750 tax credit, and vehicles that meet battery component requirements are eligible for a $3,750 tax credit. Vehicles meeting both the critical mineral and the battery component requirements are eligible for a total tax credit of up to $7,500....To be eligible for the credits under these provisions, vans, sport utility vehicles, and pickup trucks must meet the additional requirements of not having a manufacturer suggested retail price (MSRP) above $80,000, and all other vehicles may not have an MSRP above $55,000. Additionally, the eligibility of individuals for the tax credit is further limited by thresholds for modified adjusted gross income (MAGI); only individuals having a MAGI below the following thresholds are eligible for the tax credit: $300,000 for joint filers, $225,000 for head-of-household filers, $150,000 for single filers."
As you can see quite a bit has changed. Gone are the caps on manufacturers and in are caps on the price of the car and the income requirements for the purchaser. And, the tax credit now relies heavily on a percentage of the battery materials being extracted and assembled in the US. By 2027, to earn the tax credit at least 80% of the processing and assembly of the battery has to be done in the US. For 2023, at least 40% must be processed or extracted and at least 50% must be produced or assembled in the US. Together, you would be eligible for the same $7,500 as currently available. Also, for 2023, there is now a tax credit on used EVs. That may be good news for Nissan Leaf owners.
Why It Matters:
This is quite a big deal. As any change at at the government level has industry wide ramifications. Businesses will need to align with these changes. The biggest issue I see is given the income restriction and the price cap, there are very few people and cars that qualify under these standards today. If the push to EVs is funded by the rich, why not also give the tax break to those that are funding it. Currently EVs are not affordable to the mass market. With improvements, we will get there quickly. The faster we move through Geoffrey Moore's technology adoption cycle, the faster EVs will be affordable for more people.
How does this fit into the larger trend:
Industry wide changes like this set the trend. The tailwinds from a decision like this certainly spur action on the state and local level as well. There is over $300 billion in investments through 2030, many of which were not mentioned in this article. While political winds may change, its getting harder and harder to change the ship's direction.