Senator Joe Manchin, Chairman of the Senate Energy and Natural Resources Committee, is not happy about how his wording in the Inflation Reduction Act is being interpreted by President Biden’s Department of the Treasury. Treasury’s proposal allows a much wider claim on the electric vehicle tax credit than he says he intended. The Treasury Department is offering U.S. automakers leniency in being able to use more foreign-sourced minerals and battery parts without losing the tax break and allowing European and Japanese companies to get a piece of the incentives. The proposal takes effect on April 18, giving automakers and consumers two more weeks before the new restrictions from the Inflation Reduction Act take place. After that date, fewer electric vehicles will qualify for the full tax credit than the number of models eligible under the old law, but more than was the intent of the Inflation Reduction Act. Its stated intent was to build the industry in the United States and not rely on China, which dominates the EV battery supply chain currently. Senator Joe Manchin called Treasury’s guidance a horrific giveaway to foreign suppliers.
According to the Inflation Reduction Act, to qualify for $3,750 of the credit, an increasing share of a vehicle’s battery minerals such as lithium and nickel has be extracted or processed in the United States or in a country with which the United States has a free-trade agreement. The other half of the credit is supposed to be available only for vehicles in which a majority of its battery components are made in North America, starting at 50 percent this year and up to 100 percent by 2029. Few EVs currently on the market are expected to qualify for even half of the credit. Automakers including Germany’s Volkswagen have announced plans to expand in North America, seeking certainty their models will qualify for the incentives. Most minerals are mined and processed in countries that do not have free trade agreements with the United States, such as China, Indonesia and the Democratic Republic of Congo. Key battery components—namely, active anode and cathode materials—are mostly produced in China, Japan and South Korea.
According to the Treasury Department’s proposed rules for the tax credit, electric vehicles leased to consumers will be able to qualify for a separate commercial vehicle tax credit, which does not entail sourcing, income or price restrictions. This is a huge loophole, because the law imposed an income limit to qualify for tax subsidies of $150,000 for individual EV buyers, and a price cap for vans, SUVs and pickups ($80,000), and sedans ($55,000). In the Treasury’s determination, dealers or auto finance companies could receive the tax credits or pass them on to customers. EV buyers have typically been high-income individuals, and this leasing loophole will allow them to reap tax subsidies through a backdoor approach.
Treasury is also redefining “free trade agreements” to include one-off deals with countries that commit not to impose trade barriers on critical minerals. The White House has already struck such a deal with Japan and is negotiating deals with Europe. This is a departure from congressionally approved trade agreements in much the same way the Biden Administration has declared the United States subject to the Paris Climate Accord without a treaty vote. Anode and cathode materials in batteries would also be treated as critical minerals rather than components. These changes will allow more vehicles to qualify for both parts of the credit, removing Senator Manchin’s sourcing conditions.
The revision to the rules means that the real cost of the climate and energy subsidies in the Inflation Reduction Act will be far more than the $391 billion that Democrats claimed when they passed the bill. Goldman Sachs estimated recently that the cost of the Inflation Reduction Act could be more than triple the original estimate–$1.2 trillion over 10 years because of the EV tax credits and other provisions of the bill. The Treasury Department is allowing comments on the proposed EV tax credit rule for 60 days.
The full list of qualifying cars will not be published for a couple of weeks and will be updated monthly. Tesla indicated that the least expensive version of its Model 3 sedan, one of the most popular electric cars, would no longer be eligible for the full credit because the car uses a battery made in China. General Motors, on the other hand, indicated that three electric vehicles it plans to sell this year — the Cadillac Lyriq and electric versions of the Chevrolet Equinox and Blazer sport utility vehicles — would qualify for the full credit.
Treasury’s guidance was originally due in December, but the department postponed the proposal’s release until the end of March. In the meantime, it allowed the credit to go into effect without any restrictions on where a vehicle was produced. Since January, electric vehicle buyers have been able to receive the credit as long as they did not exceed an income threshold and the car was below a certain price. The new proposed Treasury rules apply to vehicles picked up by their owners on or after April 17, even though they would not become final until at least June.
In 2024 and 2025, the criteria for the tax credit will become more stringent as provisions go into effect prohibiting the sourcing of any battery parts and critical minerals from “foreign entities of concern” — which should include China. That could be a major hurdle since many top mining companies are partially Chinese-owned or process their minerals in China. Guidance on the “foreign entities of concern” provision from the Treasury will not be released until later this year.
Conclusion
Senator Manchin said his comment “is simple: stop this now—just follow the law.” But the Biden Administration has been bucking the law in every way it can, including avoiding the congressionally enacted Offshore Leasing program, to further its climate agenda.
President Biden has a goal that 50 percent of new car sales in 2030 will be electric and is doing all he can to meet that target, including assuming powers beyond those traditionally exercised solely by the Executive Branch. In pursuit of his plans for new ways to electrify the United States, President Biden is assuming new powers which previously were held in check and balanced with other branches of the government. According to Manchin, “It is horrific that the Administration continues to ignore the purpose of the law which is to bring manufacturing back to America and ensure we have reliable and secure supply chains.”
