It’s possible no electric vehicles will qualify for the new tax credit

The Inflation Reduction Act is expected to pass easily in the House of Representatives after it passed the Senate on Sunday. Changes to the tax code are intended to prevent the worst effects of climate change.

There is a revision to the tax credit for plug-in electric cars. The IRA introduces income caps for the tax credit and it only applies to cars that cost less than $55,000. The 200,000 vehicle cap on the tax credit was dropped by the bill.

If their EV batteries are mostly made in North America, with at least 40% of the materials used having been processed in North America or a country with a free trade agreement, it will be possible. Half of the credit is tied to where the pack is made and the other half to the supply chain. If you're planning on buying an EV in 2023, that will be a challenge.

Some manufacturers are building factories in North America. Ford and Volkswagen are using cells made in Georgia, as well as GM and LG Chem in Ohio. Ford and SK are building plants in Kentucky and Tennessee, as well as other US battery plants, among others. Depending on the value of the battery, some electric vehicles may be able to get half the full credit.

Guidance that will have to be issued by the IRS will determine a lot. According to Sam Abuelsamid, principal research analyst at Guidehouse Insights, it appears that almost no cars will qualify. It's not certain which EV will qualify for at least $3,750, but the list may include the Ford mustang Mach-E, the locally produced Volkswagen ID.4s, and the GM EV that uses Ultium cells.

It is more straightforward about the other half of the credit. Even if these domestic battery plants increase the US's share of battery manufacturing, it will take at least 40 percent of the critical chemicals that go into those cells to be processed locally.

About two-thirds of the world's lithium, much of its cobalt, and almost all of its graphite are produced in China.

One local source of battery materials will be provided by domestic recycling of Li-ion batteries. GM was already trying to source as much as possible locally, but there is a race to secure contracts for future production which may limit their choices.

The Secretary of Transportation Pete Buttigieg needs to give guidance on how the new rules will be interpreted once the bill has been signed. In the case of a point-of-sale rebate and manufacturing value of a battery, the income will be determined.

There is no grace period after the guidance is issued. If you have a binding contract to buy a new EV by the time the law is passed, it should still be eligible for the old tax credit.

The grant funding will help accelerate the domestic industrial base conversion. Most vehicles won't be eligible for the incentive because of the EV tax credit requirements. It's a missed opportunity and a change that will surprise customers in the market for a new vehicle. John Bozzella is the president and CEO of the Alliance for automotive innovation.