EV Tax Credit in Inflation Reduction Act Very Limiting: ‘Most Vehicles Immediately Ineligible’

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Is the Inflation Reduction Act a runaway win for electric cars? Not so fast — some experts aren’t convinced the legislation will do much for current EV makes and prospective owners. Not to mention the high costs that make them unattainable for many families.

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Over the weekend, the Inflation Reduction Act passed in the Senate; it is now headed to the House for a final vote. Among the provisions in the bill are added benefits to Medicare and lower premiums for the Affordable Care Act, as well as sweeping tax reform. It also includes some of the biggest eco-friendly measures in U.S. history, such as incentivizing the purchase and use of electric vehicles to lessen emissions and boost clean energy.

Under the new Act, new owners of EVs will receive the $7,500 tax credit already existing for current drivers; however, now it will be available upon purchase rather than waiting until tax filing time. If the legislation is passed, the program would start January 1, 2023 and run through 2032.

Eligible autos include cars with a manufacturer suggested retail price (MSRP) under $55,000 and up to $80,000 for SUVs and trucks. Those filing taxes as head of household/single filers have an income cap of $150,000, while couples are maxed out at $300,000, further pushing the middle class into purchases of EVs. The other great part is that the new Act removes the previous requirement that the only EVs eligible had to be from manufacturers that have not yet reached sales of 200,000 models. That means Tesla and GM have skin in the game again.

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While that may sound like a boon for the sales of eco-friendly cars, there are a few catches that have insiders wondering if any current electric autos on the market will even be eligible.

One big snafu is that EV eligibility in this new bill depends on using key components made in North America. It stipulates that 50% of the battery parts and 40% of the minerals have to come from U.S. shores or a country with which we have free trade agreements, and must be done so by December 2023 and December 2024, respectively. Those figures will go up by 10% each year of the program.

The problem: Currently, 90% of minerals used in EVs are processed in China, according to Katherine Stainken, vice president of policy for the Electrification Coalition, per Spectrum News.

While many automakers are spending billions scrambling to get processing plants up and running — including Ford, Hyundai and Tesla — in the short term, this may hurt EV sales and is counterproductive for many manufacturers who have eyed targets for full electric car production lines in the future. General Motors, for example, stated in 2021 that they want to nix gas-fueled vehicles by 2035.

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“Unfortunately, the EV tax credit requirements will make most vehicles immediately ineligible for the incentive. That’s a missed opportunity at a crucial time and a change that will surprise and disappoint customers in the market for a new vehicle. It will also jeopardize our collective target of 40-50% electric vehicle sales by 2030,” John Bozzella, president and CEO of the Alliance for Automotive Innovation, said in a blog post on the agency’s website.

This hiccup has even prompted some consumers to rethink their orders until the manufacturing puzzle is solved. On Ars Technica’s site, one person commented, “I think the reality is that at this point I’m going to cancel my order. The price of my car has already gone up over $5k before the official release of the vehicle, and with the tax credit I thought, ‘Ok, that’s not great, but I’ll survive.’ Facing paying a total of almost $13k higher than when I specced out the car in the last few months of last year, however, is just a bridge too far.”

The other issue, of course, is that sticker prices for electric vehicles far outpace regular gas-powered cars and are not wholly affordable for many people within the new income caps. According to Kelly Blue Book, new EVs can have an MSRP up to $20,000 higher than traditional cars.

As noted by the The New York Times, because EVs have been in such demand from wealthy buyers, manufacturers haven’t exactly been swayed to make models with lower price tags. In fact, Tesla increased the price of their Model 3 — aimed to be for “regular folk” — by $12,000 due to demand. And because of the hype, there are very few used options available that might have also cut down on the cost.

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Add to that the fact that buyers in lower-income brackets may not always have a driveway or garage in which to recharge their vehicle, and public charging stations are at a premium and not always convenient.

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While, ideally, these issues will be resolved over time, it won’t be done overnight, and not nearly as quickly as the Inflation Reduction Act is expected to pass.

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About the Author

Selena Fragassi joined GOBankingRates.com in 2022, adding to her 15 years in journalism with bylines in Spin, Paste, Nylon, Popmatters, The A.V. Club, Loudwire, Chicago Sun-Times, Chicago Tribune, Chicago Magazine and others. She currently resides in Chicago with her rescue pets and is working on a debut historical fiction novel about WWII. She holds a degree in fiction writing from Columbia College Chicago.
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