NEWS

Inflation Reduction Act Passes Senate

August 8, 2022

The Inflation Reduction Act ends per-manufacturer limits for the $7,500 tax credit for electric vehicle purchases, but adds complexity.

The US Senate has passed the “landmark” Inflation Reduction Act bill — a comprehensive tax, climate and healthcare bill that’s on-track to become law after a year of Democratic infighting over the “Build Back Better” act. In its final form, the bill has been trimmed from its original $6 trillion price tag to an estimated $437 billion (or: about the combined net worths of just Jeff Bezos and Elon Musk).

It’s Good, But It’s Different

Electric Silverado - Chevy Silverado EV — _{Chevy Silverado EV; courtesy GM.}

On the surface, the Inflation Reduction Act is a huge win for electric vehicles. For starters, cars built companies like GM, Tesla, and Toyota that had hit the 200,000 unit “cap” under the previous laws will again be eligible for the full $7,500 Federal tax credit for qualifying EVs and PHEVs. The scope of what vehicles are eligible has changed, too, with cars packing both a plug and a 7 kWh battery (down from 15 kWh) now being eligible for the bigger tax credit.

The smart people at international tax firm, Orrick, explain that the tax credit will apply if the vehicle is, “either (1) propelled to a significant extent by an electric motor which draws electricity from a battery with a minimum capacity of 15 kWh (reduced to 7 kWh if the vehicle’s gross vehicle weighting is less than 14,000 pounds) and capable of being recharged from an external source of electricity, or (2) satisfies certain requirements for ‘qualified fuel cell motor vehicles’ under existing section 30B of the Internal Revenue Code.”

There’s more to all this than just throwing tax credits around, however. In order for their customers to benefit from the full tax credit, the vehicles they buy will have to be built in North America, and so will their batteries.

There’s a bit more complication there than that, even. That battery clause, it’s hoped, will quickly end US manufacturers’ reliance on Chinese lithium for the battery supply chain — but, since there are currently zero active lithium mines in North America, it remains to be seen how that particular clause will play out. But, to give you a sense of some of the changes that might be coming, consider the following:

GM already assembles its electric vehicles in North America, and they’ve been making moves to start building a lot more of them here, as well. At first glance, then, they seem like they’ll be able to benefit from the full tax credit— but will their recent, massive deal with Korea’s LG Chem that secured batteries for up to five million EVs undo that tax credit?
Today, customers can buy a Volvo C40 or Polestar 2 or Volkswagen ID.4 or Mercedes-Benz EQE and enjoy the full $7,500 tax benefit. None of those vehicles are built in North America, however— does that mean that, going forward, they won’t get a tax credit? (That’s how we’re reading, the morning after —Ed.)
Currently, there is no “price cap” on eligible vehicles, so that buyers of a $125,000+ Mercedes-Benz EQS580 4MATIC are eligible for a $7,500 tax credit. When the Inflation Reduction Act becomes law, electric vehicles carrying a price tag higher than $80,000 will no longer be eligible — a fact that EV startups like Rivian and Lucid have already been preemptively complaining about.
Heavy-duty commercial trucks could be eligible for up to $40,000 in tax breaks, but it’s not yet clear (to us, anyway) if buyers of trucks from companies like Volvo and Nikola will be held to the same “built in North America” battery standards as buyers of consumer vehicles. Again, quoting Orrick, “The credit for commercial vehicles, at a maximum of $40,000 (for vehicles weighing 14,000 pounds or more), is far more significant than the credit for other clean vehicles, which is limited to $7,500. For instance, it appears that an electric semi, such as the Tesla Semi, [which is expected to list for] $150,000; the credit would bring the cost down to $110,000.”
Finally, the Inflation Reduction Act now allows buyers of pre-owned EVs to receive up to $4,000 in tax credits (or 30% of the sale price of a used EV, whichever is lesser). The credit for used EVs is not contingent on regional assembly or sourcing requirements, however — which should drive up residual values and lower lease rates on new vehicles, whether they are eligible for the initial tax credit or not. If you’re keeping a keen eye on used vehicle prices, there might be a lot to unpack there, as well!

The hosts of the Electrify News Podcast started unpacking the language in an earlier version of the Inflation Reduction Act last week, and hit a lot of the major themes in the bill there. You can listen to it in the Spotify player, below, as well as Apple Podcasts, Google, or whatever platform you prefer, then let us know what you think of the new bill’s passing in the comments section at the bottom of the page.

As for the bill itself, the vote was 51 Democrats in favor to 50 Republicans against, with Vice President Kamala Harris casting the tie-breaking vote after an overnight marathon of last-minute amendments. The Inflation Reduction Act now goes to the House, where the Democratic majority is expected to pass it on Friday.