If you‘re considering an electric vehicle (EV) purchase, changes coming to the popular federal EV tax incentive likely have you full of questions. As an experienced industry analyst and EV enthusiast, let me provide a comprehensive overview of what the tax credit means today in 2022 and how modifications taking effect next year could alter eligibility among the steadily growing number of EV options.
A Quick Primer on the EV Tax Credit
First, let‘s start with a quick rundown of what the incentive is and how it works. The EV tax credit allows you to reduce your federal tax bill dollar-for-dollar based on the qualifying purchase of a new electric vehicle. For 2022, it amounts to a maximum of $7,500 based on the EV‘s battery capacity and other factors outlined below.
Congress originally introduced this tax credit back in 2009 as a consumer-oriented effort to incentivize purchases of electric vehicles. The hope was accelerating EV adoption would help reduce emissions and reliance on fossil fuels as the nation moves towards a greener future. The policy also aimed to boost the emerging electric vehicle manufacturing sector.
Surging EV Sales Demonstrate Policy Effectiveness
So how well has the policy worked to motivate buyers and enable growth up until now? The numbers tell a resounding success story for EVs. Total EV sales grew more than 60% year-over-year in Q1 2022, hitting a record high over 10% share of all new vehicles sold. Over 670,000 fully electric vehicles now traverse U.S. roads.
While rising gas prices and expanding model options no doubt also helped drive adoption, analysis suggests the tax credit decisively factored into consumers going electric. Studies show access to federal credits correlated closely with increased state-level shares of EV purchases. Surveys also confirm the tax incentive sways many to choose an EV over conventional vehicle.
New Requirements Kick In Starting 2023
Given the surging consumer appetite for EVs, you might assume eligibility for the tax credit holds steady. But with the signing of the Inflation Reduction Act this past August, substantial changes take effect next year that stand to shake up the qualifying EV list.
The most impactful revisions center on new manufacturing requirements for critical EV components, especially batteries. Let‘s examine exactly what‘s changing and why some automakers have raised concerns.
Tighter Guidelines for Sourcing Aim to Boost Domestic Production
Beginning in 2023, electric vehicles will only qualify for the tax credit if final assembly occurs in North America. Additionally, a set percentage of battery components must get manufactured in North America or the United States.
That percentage starts at 40% of battery component value in 2023 before stepping up to 80% in 2027. The rules also dictate that by 2024, a minimum amount of battery minerals come from the U.S. or countries sharing free trade agreements. That starts at 40% of value from such locations and eventually rises to 80% in 2027.
| Year | Battery Component % Value | Critical Mineral % Value |
|---|---|---|
| 2023 | 40% | – |
| 2024 | 50% | 40% |
| 2025 | 60% | 50% |
| 2026 | 70% | 60% |
| 2027+ | 80% | 80% |
You can think of battery components as the physical cells, modules, and packs that store and deliver power to drive electric motors. Critical minerals constitute the raw materials that enable this electrochemical energy storage and conductivity. For lithium-ion batteries common among EVs, that means metals like lithium, nickel, cobalt, and manganese.
Driving this shift is policymakers‘ desire to incentivize domestic manufacturing and fortify supply chains considered vital to national interests. Reducing reliance on imported components also intends to improve environmental protections and labor standards. For consumers, though, this mainly means pay close attention to which EVs qualify starting next year.
Mixed Bag for Automakers as Some Models May No Longer Qualify
For automakers, these new qualifying guidelines require extensive supply chain localization within tight timeframes. Let‘s look at likely impacts to eligibility among major EV producers next year based on their existing manufacturing footprints:
- Tesla: Strong chance for continuity as it assembles all U.S. models domestically and utilizes Panasonic battery production in Nevada. But its reliance on imported lithium could put it at risk for the mineral value requirements when those fully phase in.
- Ford: Seems well-positioned to qualify given domestic assembly and forthcoming battery plants with Korean partner SK Onnovation that should meet localization marks. Mach-E and F-150 Lightning expect to retain eligibility.
- GM: Similarly bullish on its ability to qualify thanks to U.S. assembly and battery production via Ultium Cells joint venture with LG. But will need to assess mineral sourcing.
- Rivian: Faces challenges since it currently imports battery components from Samsung SDI and LG Chem. Has partnerships and plans to eventually produce locally, but uncertain if that ramps fully by next year.
- Lucid: In a similar situation to Rivian as it imports lithium-ion cells from overseas suppliers, with future aspirations for U.S. sourcing that may not solidify by next year.
- Stellantis: Imports batteries from LG for its Pacifica PHEV which could put eligibility at risk. Promising domestic battery plant plans with Samsung SDI but timeline unclear.
- Honda/Toyota: Rely on imported batteries from Japanese partners like Panasonic. Major hurdles to qualify in 2023 unless rapid supply chain shifts. Potential loss of bZ4X and other planned EVs as compliance cars.
As this overview demonstrates, consumers eyeing certain makes and models should track manufacturer supply chain announcements closely leading up to 2023 tax season.
EV Adoption Risks Slowdown Before Eventual Rebound
With fewer vehicles likely qualifying at least early on, the tax credit changes seem poised to temporarily dampen EV adoption from its meteoric rise. It may take a few years for re-shored manufacturing to catch up with the policy‘s stricter requirements. We could see automakers push buyers towards remaining qualifying inventory which might present some deals.
But any environment of confusion around eligibility status risks seeing buyers revert back to gas-powered models. Total EV sales may sink. On the plus side, clear guidelines far in advance inform automaker decisions to onshore production. I expect model qualifying lists to expand substantially again within the next 3-5 years.
Maximizing Savings as an EV Buyer
Given the uncertainty upcoming changes cause for benefits status of individual EV models, buyers motivated chiefly by tax savings have reason to consider purchasing before year-end 2022. That locks in the full $7,500 credit before any potentially reduced eligibility.
For those less constrained by vehicle preferences or purchase timing, staying apprised of manufacturer supply chain announcements can provide hints into what options should qualify in 2023. Some may wait until next fall when qualification guidance gets released.
And remember to research other state and local incentives layered on top of federal credits. Those can help bridge any gaps from lowered or voided federal tax credits during this transitional period. EV buyers need to crunch numbers on total cost of ownership, not just sticker prices.
The Road Ahead
In closing, the EV revolution continues gaining momentum even with tax credit evolutions on the horizon. As manufacturers re-shore production this decade, Americans should soon enjoy both low emission vehicles and high-value jobs. With savvy navigation of incentives and upfront costs, an EV still offers long term savings over comparable gas vehicles. The road leads towards electrification.
Hopefully this overview gives you confidence in assessing the changing electric vehicle landscape. Let me know if you have any other questions!
