EV buyers struggle to navigate new tax credits

David Di Pinza of Temecula, California, would like to replace his aging 2013 Ford C-Max hybrid with an electric vehicle.

He is a cage cashier at a local casino and was planning to dip into his 401(k) savings to afford the purchase.

The prospect of a $7,500 rebate would make an EV a viable option.

So when Congress approved point-of-sale discounts on EVs through the Inflation Reduction Act, Di Pinza was thrilled.

But the more he read about the law’s new requirements, the more he realized his options would be limited – so limited, industry advocates estimate, no existing EV would qualify once the policy comes fully into effect.

The new law tweaked an existing $7,500 income tax credit to be offered as a front-end discount and lifted a manufacturer cap that has prevented popular models like the Chevrolet Bolt or the Tesla Model Y from qualifying.

However, it added requirements that vehicles be assembled in North America and use increasing amounts of critical minerals from the U.S. or free trade agreement countries and North American battery components.

It also put caps on eligible vehicle prices and buyers’ incomes.

Experts say that in the long term, it will likely make electric vehicles – still significantly more expensive than gas-powered cars, on average – more accessible.

“Ultimately, it’s going to be really great for EV buyers,” said Chris Harto, a senior policy analyst for transportation and energy at Consumer Reports. “But I think we’re in for some confusion and uncertainty over the next year or two as automakers adjust and different parts of the rules kick in.”

As that transition begins, consumers like Di Pinza are left gambling on whether to buy an EV now with limited options and discounts, or to wait and risk missing the boat on a tax credit as the industry changes.

It’s a complicated, time-sensitive decision that also comes as supply chain challenges have pushed wait times for electric vehicles to months.

“It would be nice if there was some clarity about which cars really will be” eligible, Di Pinza said.

If the requirements disqualify all existing models in the short term, “I think all of us who would like to buy an EV and can’t afford it without the tax credits are gonna get really pissed and just be discouraged.”

For years, consumers have been able to get up to $7,500 off what they owe on taxes at the end of the year when they buy a new electric vehicle.

But that meant people may not get the full credit value and that they had to have the money up front for an EV, which cost more than $66,000 on average compared with over $44,000 for a gas-powered non-luxury vehicle, according to Kelley Blue Book.

There was also a 200,000-vehicle-per-manufacturer sales cap, making companies ineligible as soon as they produced a popular EV. Tesla Inc., General Motors Co. and Toyota Motor Corp. have already hit the cap.

Michigan Democrats Rep. Dan Kildee of Flint and Sen. Debbie Stabenow of Lansing hoped to change that.

But their proposal – which favored unions and, by extension, the Detroit Three – was transformed by conservative Democrat Sen. Joe Manchin of West Virginia to only reward automakers with credits if they adhere to new, U.S.-centric requirements.

The Inflation Reduction Act signed into law on Aug. 16 included new tax credits that immediately required that vehicles be assembled in North America, leaving only around 30% of existing EVs eligible.

Beginning in January 2023, vans, SUVs and pickups have to cost less than $80,000 and sedans less than $55,000.

Only joint tax filers making less than $300,000 and single filers making less than $150,000 will be eligible. The old 200,000-vehicle cap will be lifted.

Once those requirements are met, the vehicle qualifies for $3,750 if at least 40% of its battery minerals are from the U.S. or free trade agreement countries and the other $3,750 if at least 50% of the battery components come from North America.

At that point, industry experts estimate consumers will be left with no qualifying options because the critical mineral supply chain is dominated by China and automakers are still building up domestic battery production.

Analysts say automakers will eventually be able to meet the requirements, but it will take years.

It’s not until 2024 that the point-of-sale rebate comes into effect, dropping vehicle prices for consumers on the front end.

For would-be EV buyers, that shifting timeline is causing turbulence.

Companies like Volkswagen AG, Nissan Motor Co. and Rivian Automotive Inc. offered buyers accelerated purchase agreements in the final days before the bill was signed to lock in credits under the old system.

Electric vehicle message boards and forums are rife with discussions on how buyers plan to move forward and whether their vehicle of choice will qualify.

Many noted that dealers and automakers are bumping prices so high it would make the credit nearly moot, such as Ford Motor Co. announcing it would raise the price of the F-150 Lightning between $6,000 and $8,500 one week before the new policy became law.

Kevin Pitts, the owner of an entertainment company in Long Island, was considering buying a Kia EV6 that was eligible for a tax credit.

But because it’s assembled in South Korea, it lost eligibility on Aug. 16 when the new law came into effect. Local dealers told him there would be a $5,000 to $10,000 markup on the car anyway due to production backlogs.

Now he’s looking at a Volkswagen ID.4, which will be produced in Chattanooga, Tennessee. But dealers can’t tell him whether it will be eligible under the critical mineral requirements when it arrives in eight or more months.

“It’s like the wild, wild West,” he said.

Di Pinza put in an order for a Chevrolet Bolt and was told it would arrive sometime between September and January.

But now he’s planning not to take it, instead opting to wait until 2024 when he’ll have more certainty it fits the criteria and he can use the off-the-top discount.

“There’s four-dimensional chess going on in terms of it is a good idea or not” to buy a certain vehicle right now, said Mike Ramsey, a transportation and mobility analyst for Gartner Inc. “I would proceed as though you are not going to get a tax credit and hope that you would.”

Harto of Consumer Reports recommends buyers who really want an EV and have found a vehicle that fits their budget without the tax credit should “go ahead and buy it.”

But he added that consumers who are able and willing to wait can expect more options and lower prices on EVs in the coming years as automakers ramp up production.

With the elimination of the 200,000-vehicle cap, automakers will be incentivized to build affordable EVs at scale. For example, the 2023 Chevrolet Bolt has an MSRP of $26,500.

“If they can build it compliant with these requirements, consumers are going to be able to get into that vehicle for under $20,000,” Harto said. “It’s hard to get into any new vehicle for under $20,000.”

Ramsey said even more than EV adoption, the new credits are likely to make progress toward Manchin’s top EV priority – creating a regional supply chain for resources the U.S. government sees as key for the future.

“If we think we’re going to end up with a big mix of electric vehicles in the future, we have to do something that incentivizes the industrial policy,” Ramsey said. “A much bigger incentive to put battery plants, assembly plants and the base materials domestically.”