One of the biggest money-in-your-pocket policies from the Inflation Reduction Act (IRA) is causing a major stir in the U.S. and abroad. The new $7,500 electric vehicle tax credit went into effect Jan. 1, but at least one Senate Democrat wants to temporarily yank back the perk.
Sen. Joe Manchin, D-W.Va., introduced a bill last week to delay the program he helped write over a major disagreement he’s having with the Treasury Department on its implementation. The Treasury is also facing pressure from U.S. allies over the requirements to qualify for credits.
From the moment the IRA passed, it was clear that it would be pretty hard to even find a vehicle to buy that qualified for the full $7,500 EV tax credit.
The new rules state that in 2023, at least 40% of the car batteries’ minerals must be extracted or processed in the U.S. or in a country with which the U.S. has a free-trade agreement. That percentage goes up to 80% by 2027.
On top of that, in 2023, 50% of the battery components must be manufactured or assembled in North America. That percentage goes up to 100% by 2029. Final assembly of the vehicle must also take place in North America.
The glaring issue of these requirements is that the supply chain to meet them doesn’t yet exist. According to the International Energy Agency, in 2021 China controlled about 75% of the battery market, compared with 7% from the U.S.
The legislation will no doubt incentivize more American-sourced and made battery components – and reduce reliance on China – but it won’t happen overnight.
Three days before the new EV tax credit policy was set to take effect, the Treasury announced it was delaying the mineral and battery component requirements until March so it could have more time to figure out how to measure those percentages to determine which vehicles would qualify under the terms.
But it wasn’t delaying credits from taking effect, so starting Jan. 1, people could score the extra $7,500 tax credit by buying a vehicle that met the other guidelines, battery requirements not included.
“It is unacceptable that the U.S. Treasury has failed to issue updated guidance for the 30D electric vehicle tax credits and continues to make the full $7,500 credits available without meeting all of the clear requirements included in the Inflation Reduction Act,” Manchin said in a statement.
His proposed legislation would stop EV credits until the Treasury issues guidelines in line with the IRA. And what about the scores of EV buyers who already claimed the credit since Jan. 1? Manchin’s office confirmed with Straight Arrow News that those taxpayers would need to refund the money.
U.S. allies’ issue
Manchin’s concern is not the only backlash the Treasury is facing. Major U.S. allies like the EU and Japan are taking issue with the minerals requirement that mandates a certain percentage come from the U.S. or a country with which the U.S. has a free-trade agreement.
The EU and Japan do not have traditional free-trade agreements with the U.S. and the language in the legislation is sparking threats of a trade war. The EU claims the U.S. subsidies discriminate against European EV makers.
Treasury Secretary Janet Yellen said the EU and Japan could negotiate new trade agreements to come into mineral compliance, but that solution will not satisfy the other two parts of the deal, where battery components must be made in North America and final vehicle assembly must also happen on the continent.
Some EU leaders have proposed introducing competing subsidies for vehicles built on the bloc, to counter the U.S. tax breaks.