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Senate Deal Leaves Few EVs Qualifying for Tax Credits

2022 Nissan Leaf at public charging stationThe U.S. House of Representatives is scheduled to vote today on a bill that could radically change how Americans buy electric cars. The Inflation Reduction Act passed the Senate less than a week ago. It includes provisions designed to help millions of Americans buy new electric cars. But most electric cars currently on the market may not qualify for the credit, at least in the short term.

How the Incentive Works Today

The federal government currently provides a tax credit of up to $7,500 on the purchase of many electric vehicles (EVs). But the credit is given as a tax rebate — buyers must pay for the car, then apply for a rebate the next time they file their federal income taxes.

It also applies to just the first 200,000 EVs or plug-in hybrid vehicles sold by each manufacturer. Already, GM and Tesla have exhausted their credits. Toyota and Lexus have sold enough to see their credits cut in half. They will sunset gradually, ending completely more than a year from now.

Some states and electric utilities also provide assistance with EV purchases.

Rebate Becomes Discount; Used EVs Eligible

The Inflation Reduction Act would change the rebate system by allowing dealerships to apply it as a discount at the time of purchase.

Studies have shown that Americans would prefer an upfront discount to a tax rebate.

It would also create a new $4,000 federal incentive to help Americans purchase used electric cars.

Bill Would Add Price, Income Caps

But the bill would restrict the credit based on both the buyer’s income and the car’s price.

Only individuals reporting adjusted gross incomes of $150,000 or less would qualify. For those filing as head of household, the cap would be $225,000. Joint filers would need to show income under $300,000.

The vehicle they buy, if it’s a truck or SUV, would need to carry an MSRP under $80,000. If it’s a sedan or other car, it would need a sticker under $55,000.

Those provisions eliminate many EVs from consideration. Tesla’s best-selling Model Y SUV squeaks in under the cap. Standard Range versions of its Model 3 sedan do as well. But the Model 3 Long Range and Performance are priced out, as are the Model X and Model S.

BMW’s new i4 and iX EVs miss the cutoff. So, too, does most of the Mercedes-Benz lineup of electric cars.

Where It’s Built Matters, Too

But perhaps the most restrictive provision in the Inflation Reduction Act has to do with where new EVs are built, and where their major components come from.

The bill requires that final assembly on the vehicle take place in North America. The Alliance for Automotive Innovation (AID), an industry trade group representing automakers, warns that this provision “will make most vehicles immediately ineligible for the incentive.”

The Hyundai Ioniq 5, for instance, recently won the 2022 World Car of the Year award. It’s currently built only in South Korea and Indonesia.

The bill would also require that critical minerals used in EV batteries be extracted from the U.S. or from countries with which the U.S. maintains free trade agreements. Those requirements don’t kick in right away — they start after 2023.

But, the AIA warns, there are no vehicles that currently meet them.

“There are 72 EV models currently available for purchase in the United States including battery, plug-in hybrid and fuel cell electric vehicles,” says Alliance CEO John Bozzella. “Seventy percent of those EVs would immediately become ineligible when the bill passes, and none would qualify for the full credit when additional sourcing requirements go into effect. Zero.”

While no current EVs meet the 2024 requirements, advocates say the bill should spur development of resources and factories inside the U.S.

The List of Qualifying Cars

By our count, as few as 11 2023 EVs may qualify for the credit today. Each is built in the U.S., Canada, or Mexico and carries an MSRP that falls under the bill’s price caps. This is an evolving list and may change as analysts examine the bill’s final text.



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