The law aims to tackle climate change in numerous ways, including by incentivizing the use of battery-powered cars.
In some ways, it expands which vehicle purchases could be eligible for such a credit, but there are also new restrictions. Several VERIFY viewers have reached out to ask about those restrictions, and whether certain cars will be ineligible.
Are all electric vehicles eligible for the tax credits created by the Inflation Reduction Act?
No, not all electric vehicles will be eligible for the tax credit. Many popular models don’t currently meet the new requirements relating to pricing and where the cars are made, but that could change as companies adapt.
WHAT WE FOUND
A tax credit for electric vehicles already existed prior to the passage of the Inflation Reduction Act. The base credit was $2,500 – with taxpayers able to claim up to $7,500 for cars with longer-distance batteries. The new law sets the credit at $7,500 for all vehicles starting in 2023, if the vehicles meet certain requirements (we’ll get back to these),
To qualify as an electric vehicle under the new law, the car must have a battery that can be recharged with a plug-in system and a capacity of at least 7 kilowatt hours (up from 4 in the previous law). That means many plug-in hybrids, in addition to fully electric cars, meet the definition.
The prior law, signed by President George W. Bush in 2008 as part of the same package as the bank bailout, set a significant limitation: Once a company sold more than 200,000 electric vehicles, its cars would no longer be eligible for the full credit. Within a few years, that ruled out many of the most popular brands like Tesla.
The Inflation Reduction Act removed that barrier. However, it also created new ones.
First, it says only cars for which “the final assembly… occurs within North America” will be eligible.
Second, it imposes an income cap on taxpayers. If you file your taxes jointly or are a surviving spouse, you must make under $300,000 per year to claim the credit. Heads of households must make under $225,000. Everyone else has to be under a $150,000-per-year threshold.
Third, it prohibits the most expensive cars from being eligible. Trucks, vans, and SUVs that cost more than $80,000 don’t qualify. For other types of vehicles, the cap is $55,000.
Fourth, and most complicated, is a restriction on where the materials for the battery that powers the EV in question come from.
The Inflation Reduction Act says a certain percentage of “critical minerals contained in such batter[ies]” have to be mined in the United States “or in any country with which the United States has a free trade agreement” or recycled in North America. In 2023 – the first year the law will be in effect – that percentage is 40. It increases periodically until 2027, when at least 80% of the minerals have to be sourced from the U.S. or its free trade partners. Vehicles that don’t meet this standard are not eligible for the full credit.
The law likewise requires a certain percentage of all the battery’s components to be “manufactured or assembled in North America.” That starts at 50% in 2023, increasing to 100% by 2029.
It also disqualifies cars if “any of the components contained in the battery of such vehicle[s] were manufactured or assembled by a foreign entity of concern.” That rules out any manufacturers who rely on Chinese supply chains for their batteries.
So what does that actually mean for taxpayers and car manufacturers?
The removal of the 200,000-count cap is huge, especially since Tesla is by far the most popular EV, according to Kelley Blue Book. Teslas in general are well-positioned for eligibility, as the company primarily manufactures in the U.S, although some of its models currently exceed the qualifying price range.
Cars made by General Motors, Ford, and Nissan could also benefit from the new credit. Consumer Reports says that popular models like the Chevrolet Bolt, Ford Mustang Mach-E, and Nissan Leaf are assembled in North America. Depending on specifications, these models also tend to fall within the qualifying price range.
Companies like Toyota, Kia and Hyundai may have difficulty securing eligibility, according to Consumer Reports, as their electric vehicles are not made in North America.
But exactly which models will actually be eligible remains somewhat unclear, as we don’t know what percentage of their battery materials are sourced domestically or from U.S. free trade partners.
An analysis of the law by the Congressional Budget Office suggests the Inflation Reduction Act will result in an overall expansion of the amount of money dished out in the form of these credits to American taxpayers. Their analysis expects that expansion would be relatively slow at first, with the government giving out $85 million in 2023, then quickly pick up pace as manufacturers adjust their supply chains in order to meet requirements, with $451 million in credits forecast for 2024, and nearly $1.5 billion by 2031.
CORRECTION: A previous version of this story stated the original tax credit was $2,500. The original base credit was $2,500 but taxpayers could actually claim up to $7,500 for cars with longer-distance batteries.