Last August, President Biden signed the Inflation Reduction Act, a sweeping bill that has already led to tens of billions in private investment into U.S. manufacturing. But the U.S. Treasury department’s haphazard, inchoate implementation of the electric vehicle purchasing tax credits has led to consumer chaos and uncertainty in the new car market. Worse yet, this chaos isn’t due to indecision or incompetence, but a determined thwarting of Congressional policy setting.
The Inflation Reduction Act (IRA), passed August, 2022, modified existing tax credits in the Internal Revenue Code and introduced a slew of new ones as well.
Both modified and new credits included domestic content restrictions to promote domestic manufacturing. This was by far the largest rejection of the global multilateral trading system by the U.S. since the system’s inception in 1947. See CPA’s prescient coverage from last August.
Perhaps the most impactful IRA credit was the one created by IRA Section 13502, known as the ‘Advanced Manufacturing Production Tax Credit’. Now codified as Section 45X of the Internal Revenue Code, it bestows generous subsidies for manufacturing a host of products in the United States on a per unit basis. For example, under Section 45X, battery manufacturers can collect a check of $45 for every kilowatt-hour (kWh) of lithium battery they produce domestically (hence, ‘production’ tax credit). This article, however, is about Treasury’s malfeasance on the consumer credits.
IRA’s Credits for Purchasing Electric Vehicles: Sections 30D and 45W
Section 30D of the Internal Revenue Code was first deployed in 2009, and it provided a $7,500 tax credit to consumers when they purchased or leased a new electric vehicle (EV). There was a cap, however, wherein after a manufacturer sold 200,000 EVs, consumers could no longer get the $7,500 tax refund.
Tesla and General Motors both hit that limit late last decade, and they were also the only two high volume sellers of domestically-made EVs. At the same time, made-in-China electric vehicles under new brands like Polestar began to be imported for the first time. This led to the absurd ‘only-in-America’ situation wherein the United States government was subsidizing imported Chinese EVs, but not domestically-made ones.
CPA alone led the call years ago to either exclude China from the EV credit or abolish the credit altogether. (See Detroit News op-ed as well.)
Senators Manchin (D-WV), Stabenow (D-MI), and Schumer (D-NY) were particularly concerned, and led the charge in Congress to restrict the EV credit. Senator Manchin told Reuters last summer: “I don’t believe that we should be building a transportation mode on the backs of foreign supply chains.”
Earlier versions of the legislation restricted the credit to EVs assembled domestically, but in a concession to the highly integrated North American nature of the auto industry, the Inflation Reduction Act ultimately required that final assembly take place in North America to be eligible, as opposed to USA-only. The Chinese EV invasion would at least not be subsidized, a welcome relief.
Restrictions on 30D Credits Were So Strong, Everyone’s Expectation at IRA Signing Was That Few if Any Cars Would Qualify for Credit
For the 30D credit, the IRA’s North American final assembly restriction was just for starters. Final assembly alone got you $0 in credit. Cars like the Chevy Bolt, which is assembled in Michigan but with the battery imported from Korea, were to be ineligible for any credit.
Instead, the $7,500 was broken up into two criteria. First, a car would be eligible for a $3,750 credit if 50% of the vehicle’s battery was assembled or manufactured within North America. This required percentage goes up by 10% every year until it reaches 100% in 2029.
Second, another $3,750 would be offered (so $7,500 in total) if a percentage of the battery’s critical minerals were extracted or processed domestically, or from one of the twenty countries with whom the U.S. has a free-trade agreement. In 2023, the critical minerals percentage is 40%, and then it peaks at 80% in 2027, where it stays until 2032.
Finally, there was one last content restriction. Beginning in 2024, battery components could not be manufactured or assembled by a “foreign entity of concern”, including instrumentalities of China, Russia, Iran, and North Korea. And then starting in 2025, the same exclusion applied to critical minerals in batteries, which could not be extracted, processed, or recycled those foreign entities of concern.
In July of last year, the Congressional Budget Office estimated that only about 11,000 vehicles sold in 2023 would receive credits, costing the Treasury only $85 million. For context, 800,000 EVs were sold in the USA in 2022.
The CBO wasn’t alone. John Bozzella, CEO of the Alliance for Automotive Innovation which represents GM, Ford, Toyota, and other large global automakers, told Reuters that “None would qualify for the full credit when additional sourcing requirements go into effect”.
Treasury Systematically Undermines IRA’s EV Credit Expectations, part 1
Despite the universal expectations that beginning Jan. 1, 2023, the EV credit would essentially dry up due to all the restrictions, the opposite has happened.
The first big change was Treasury failing to meet the IRA’s end-of-2022 deadline for guidance on the Section 30D battery criteria. On December 17, 2022, Treasury announced that they’d need until “March” (no date committed) to develop the battery guidance. In the meantime, until “March” 2023, the battery criteria would be waived altogether.
This took consumers and automakers by surprise. For example, GM had already announced that it was slashing the price of the 2023 Chevy Bolt to a $26,595 MSRP, down a whopping 18.5% from the 2022 MSRP. This was before Treasury waived the battery rules until “March”. Thus, with a drastically lower MSRP already announced, the Bolt became $7,500 cheaper overnight, making it instantly the hottest ‘screaming’ deal for a new car, at least until some day in March when Treasury decides to flip the table again.
Unlike GM, Tesla does not use dealerships, and sets final consumer pricing directly. For this reason, immediately after Treasury’s December announcement, Tesla slashed its prices by $7,500, as not doing so would have guaranteed that all buyers would put off buying their Tesla until Jan. 1, when the unexpected Treasury credit would kick in.
As to what Treasury will do in March, they’ve already communicated (PDF) that they intend to go wilding. For example, despite USTR clearly listing all twenty countries with whom the U.S. has a free trade agreement, Treasury has decided to call this an open question. Who knows, maybe we’ll find out the U.S.-Japan Migratory Bird Treaty of 1972 is a free trade agreement? Hopefully that’s a facetious suggestion. There is in fact a very significant trade agreement, the mother of them all, not in USTR’s list: the GATT. The elites refuse to talk about it, but it’s very much alive, binding U.S. tariffs against 163 other countries, and them to us, except without any reciprocity. Oh and also, of the 164 nations, the United States has committed the lowest tariffs, at a 3.4% average. The GATT is the obvious move for Treasury to take an expansive view of “free trade agreement country”. No U.S. trade agreement takes all tariffs to 0%, so the GATT is no different than the other 20, except for the especially egregious lack of reciprocity. The downside for Treasury would be advertising to all Americans that we are indeed in unilateral ‘free trade’ tariff agreement with the whole world. (See CPA’s guide on GATT reform, ‘Fixing WTO Unfairness‘).
European Commission Executive Vice President and Trade Commissioner Valdis Dombrovskis said on Friday he will visit DC in early March to continue collaboration on the implementation of the Inflation Reduction Act.
Treasury Systematically Undermines IRA’s EV Credit Expectations, part 2
For its next trick, Treasury essentially conjured up a perfect nightmare for personal finance radio host Dave Ramsey, encouraging EV buyers to lease instead of buy.
A car lease is a rip-off. It is the most expensive way to operate a vehicle.
— Dave Ramsey (@DaveRamsey) March 22, 2022
To limit the reach of the Section 30D restrictions, Treasury surprised virtually everyone when they declared that the separate Section 45W Commercial Clean Vehicle credit – intended for commercial buyers, not individual consumers – would be made available to anyone who leased an EV. Consumer Reports has found that leasing is generally the most expensive way to operate a vehicle.
Senator Manchin, never imagining that the Section 45W Commercial credit would be twisted in this manner, had not copied the same domestic content restrictions from the 30D consumer credit to the 45W commercial credit. Thus, Treasury’s interpreting of all consumer leases as falling within 45W commercial uses absolves the leased car of all of 30D’s domestic content restrictions. Senator Manchin was livid at Treasury’s sneaky move, and has introduced legislation to fix this executive malfeasance.
Manchin 'raising hell' against Biden over implementation of Inflation Reduction Act https://t.co/SNz8yHHcnk
— Washington Examiner (@dcexaminer) February 9, 2023
While Treasury’s move was unexpected, it was publicly advocated for by the Government of Korea and its automakers. In the comment period prior to Treasury’s announcement, Tesla told Treasury that the 45W Commercial credit “should apply exclusively for commercial end-users”, and GM told Reuters that “sticking to the intent of the bill” drafted by Congress “is important.” Treasury evidently disagreed. Americans can lease EVs made overseas, including from China, and enjoy a full $7,500 credit as well.
Treasury’s move is even more discouraging than most realize, as historically, many EVs have not been available for sale at the end of leases. Automakers choose instead to export the used vehicles to foreign markets where their residual values are higher. This means taxpayers are paying $7,500 per lease merely for the short-term use by someone else before the vehicle is re-exported. Tesla sells the majority of EVs in America, and does not allow lease buy-outs on any of its cars, although this has been common practice among all EV makers for well over a decade. In 2019, the Kyiv Post reported on Ukraine’s impressive growth of EVs, and that most of them were second-hand imports from the United States. California HOV decals are a common appendage to EVs in smaller developing markets.
Treasury Systematically Undermines IRA’s EV Credit Expectations, part 3?
Treasury has yet to issue guidance on Section 30D’s “foreign entity of concern” language. Currently, one-third of EV batteries globally are made by China’s CATL, and China made about 75 percent of the world’s lithium-ion batteries in 2021, compared with 7 percent for the U.S.
This was a big reason why CBO and others thought the revised 30D credit would make virtually all EVs ineligible.
Ford made news on Friday when it announced a $3.5 billion investment into a new Michigan battery factory, which would be part of a joint-venture with CATL. Ford told the Detroit Free Press that Ford will control the plant, but will use the knowledge and services provided by CATL to make the Lithium Iron Phosphate (LFP) batteries there. LFP batteries are excellent for numerous reasons, including longer life, easier chemistry and the fact that they do not use any scare raw materials like cobalt or nickel. According to TechCrunch, China has owned the LFP market “for nearly a decade due to an agreement with patent holders — a consortium of universities in the U.S. and Canada” but this patent expired last year. LFP batteries were developed in North America, and in 2009, U.S. battery maker A123 Systems raised $350 million in a successful IPO and built an LFP battery factory in Michigan. But non-Chinese carmakers were not interested, and A123 went bankrupt in 2012, with most of the firm’s assets acquired by China’s Wanxiang Group.
Ford has advocated with Treasury to loosen the foreign entity of concern language, including excluding joint ventures with entities of concern. Guidance is forthcoming.