IRA’s Adventures in Wonderland
A short time ago, a dear friend of mine approached me with a question. They were in the market for a new car and asked me whether they should consider an electric vehicle, an EV? This is a relatively simple question that pulled me into the rabbit hole of all rabbit holes. It became so complicated that I ended up preparing not one, but two spreadsheets to navigate the answer. And because it is so complicated, I thought it might be useful to try to break it down here.
Why Does it Matter?
The planet is rapidly warming due to the human introduction of CO2 into the atmosphere over the last 150 years. Currently, the world average temperature is more than 1 degree Celsius over pre-industrial levels. If we are to keep the increase to 2 degrees Celsius or less, we have to get to carbon neutral by no later than 2050. A 2 degree increase in the world average temperature will lead to droughts, floods, storms, and sea level rise that are unprecedented in recent human history. To not act now will lead to warming much greater than this and multiplied effects. Available modeling suggests that this future world will be a bad place to live. As UN Secretary Gutierrez recently put it, “We are on a highway to climate hell with our foot still on the accelerator.”
The US has historically been a major contributor to the problem, and as a leading democracy, we have the responsibility to lead in the effort. Emissions in the US come largely from electricity generation, transportation, and manufacture – about a third each. In the transportation sector, burning gasoline to power our cars has been the Number 1 problem. Hence, the need to electrify our cars, trucks, buses, trains, and ships. With planes, we need to fly less and decarbonize, probably through green hydrogen. Getting my friend into an EV pushes the needle in the right direction, even if that push is miniscule in the grand scheme of things.
The Old Rules
Three years ago, we bought a Nissan LEAF SV Plus. At the time, the only remotely affordable choices available to us were the Chevy Bolt, the Tesla Model 3, and the LEAF. For our efforts, we were rewarded with a $7,500 Federal Tax Credit and a State $1,500 rebate. This brought the cost of the LEAF down to around $30,000. The only requirements for the Federal Tax Credit were that less than 200,000 vehicles of that model were sold and that we had a federal tax liability of less than $7,500 in our annual income tax filing. At the time, the Chevy Bolt and Volt and the Tesla had reached that 200,000 sales limit and were no longer eligible for the Federal Tax Credit.
The New Rules
Ah, the good old days. In August, 2022, everything changed with the passage of the Inflation Reduction Act, known quaintly in our home as “the other IRA.” The new rules are quite complicated and haven’t really been well explained by either the Federal Government or the press. The Federal Government has been cautious largely because the specific rules for implementing the portion of the law that takes effect after January 1, 2023 depend on the IRS writing them. They are still writing ferociously, so the rules probably won’t be released until after January 1st. The press has done a poor job because it the law is complicated and there is no easy way to simplify it into a single short article. I am neither the Government nor the press. So as long as you are willing to take everything I say with a grain of salt, I will attempt such explanation.
Before and After January 1, 2023
January 1, 2023 is a critical date in the implementation of the IRA. Certain rules apply before then and other rules apply afterwards. There are a few elements of the IRA that transcend the pumpkin date of January 1, 2023. First, to qualify for the Federal credit, the vehicle has to cost less than $55,000 if it is a car, and less than $80,000 if it is an SUV, truck, or equivalent. Fortunately, many For EV’s, this is not necessarily a bad thing as the platform in a normal SUV generates a higher center of gravity. Loading batteries on the chassis lowers that center, so an SUV EV is naturally more stable than a non-EV.
Although the law excludes taxes and delivery charges from that limit, it does not exclude options. So, if you have an actual car with a MSRP of $53,000 but want the better audio system or trim, it will push the price past the $55k limit. For cars with a MSRP in the upper $40’s or low $50’, one wonders if this will give buyers some leverage on price as these manufacturers might find those cars sitting on the lot like forever, while less expensive configurations will fly like hotcakes, having their glove compartments stuffed with an extra $7,500.
The second major aspect to the IRA is that to qualify for the tax credit, your income has to be less than $150,000 a year if you’re filing as a single, or $300,000 a year of you are filing jointly. This will not affect most of the people I know, but it is a nod to the idea expensive EV’s for wealthy people should not be part of the IRA DNA.
Beginning in August 2022 with the passage of the law, the IRA imposes a North America vehicle assembly requirement. The vehicle has to have final assembly in North America to get the tax credit. Before January 1st, a vehicle assembled in North America can qualify for the full $7,500 credit. After January 1st, the North American assembly requirement qualifies a vehicle for a portion of the credit: $3,750. The other half is in battery manufacturing (see below).
Finally, the maximum credits are $7,500 both before and after January 1st. Credits for used EV’s will take effect after January 1st.
Before January 1st
Here’s where things get a bit hairy, especially if you need to buy an EV now. Before January 1st, the 200,000 unit sales cap remains in effect. So the Bolt and Tesla are off the table for a tax credit if you buy one before then.
Not considering plug-in hybrids, the following models could be eligible for the $,7500 tax credit if purchased before January 1st
*Ford Mustang Mach-e (orders are backlogged, so good luck)
*Ford F-150 Lightning (orders are backlogged, so good luck)
If you are wanting the tax credit, your choices are severely limited. Otherwise, there are a number of highly rated EV’s that are assembled outside of North America.
After January 1st
After January 1st, it’s a good news/bad news story. First the good news. The 200,000 unit sales cap is removed. This brings the Bolt and Tesla back into play. Secondly, used electric vehicles are now eligible for a $4,000 tax credit. To simplify this discussion, I am not going to delve into used vehicles. Another room and door in the rabbit hole. Another time, another blog.
The bad news, such as it is, is that the $7,500 credit is divided into two halves. The first half is over the final assembly being in North America. Of the cars and trucks currently on market, all of the ones above except the Hyundai’s and the Toyota are eligible for the $3,750 NA assembly credit. The other half of the credit is where the battery is manufactured. At least half of the battery must be assembled or manufactured in North America (for 2023. In year 2024 and beyond, that percentage increases). The Chevy Bolt and Bolt EUV, Cadillac Lyric, Nissan Leaf, and Tesla Model 3 and Y all have their batteries manufactured in the US, and therefore would have the other $3,750 tax credit. As of this writing, it appears the Ford Mustang Mach-e and Ford F-150 Lighting will have their batteries imported and would not have the $3,750 credit. However, Ford has been suggesting that it will supply some of these vehicles with NA manufactured or assembled batteries in late 2023. Which and when to be determined.
And then there’s the fine print. The IRS will be writing the rules over what cars, SUV’s, and trucks qualify for which part of the IRA tax credits. Final assembly in North America seems fairly straightforward, but establishing how to determine what is 50% of manufacture or assembly might be harder to peg. The rules for 2024 and beyond are also different as percentages of battery manufacturing and critical mineral sourcing in North America are increased each year.
If you were licking your chops over the $7,500 Federal Tax Credit, you might be a bit disappointed in the selection of vehicles that qualify in part or in total. However, these credits will last for 10 years under the current legislation and more models are being introduced in 2023, notably the Nissan Ariya, the North American-assembled Volkswagen ID.4, and the Chevrolet Blazer EV. The Ariya and Blazer are both SUV’s. The Ariya is manufactured overseas and won’t qualify for any Federal Credits. The Blazer is likely to qualify for both final assembly and battery credits, and is expected to be available in the summer of 2023. Manufacturing is in Mexico, so the assembly part of the tax credit is probably assured. I do suspect GM will do everything possible to ensure the Blazer EV also meets the battery standards for the other half of the credit. The Volkswagen ID.4 will be assembled in Chattanooga starting in 2023, so the assembly portion of the credit will be met. Unfortunately, only the smaller 62kWh battery pack, assembled in North America, will be available on NA assembled ID.4’s meaning the tax credit will be for $7,500 but only for a car that has a 208 mile range. Whether VW fixes this in 2023 or not remains to be seen (see below).
The Pennsylvania Rebate
In Pennsylvania, there is an additional rebate for EV’s, up to a maximum of $3,000. However, the income requirements and purchase price requirements are more stringent. Some who could qualify for the Federal Tax Credit will not meet the Pennsylvania income limits, which are set at 4x the Federal Income Poverty Level for a $2,000 rebate and 2x the Level for a $3,000 rebate. For a family of 3, that is $92,120 and $46,060 respectively. The vehicle has to cost less than $50,000. This rebate may be limited to the first 1,000 applicants. The median household income in Pennsylvania is just under $73,000, so many of our neighbors should qualify. Also, note that the Pennsylvania Rebate includes used EV’s, also set at $2,000.
More Rabbit Holes
The IRA is already affecting EV manufacturing behavior. Hyundai just announced a new EV and Battery plant in Georgia, with manufacturing to begin in 2025. GM is signing sourcing agreements for battery raw materials. As noted earlier, VW is moving some EV production to North America. What is clear is that the IRA has caught the attention of every car manufacturer that wants to sell EV’s in the US. The bottom line is going to be: either assemble in North America and build your batteries there, or, go head to head with manufacturers that do, but whose vehicles cost $7,500 less to the consumer.
Short term, I do expect a lot of weirdness in the market. As was during the chip shortage, car manufacturers may focus their production and delivery on higher end models until battery capacity improves. However, this will only work on the cheaper models. For models that have MRSP’s near or above the $55,000 or $80,000 pumpkin numbers, dealers may have to offer substantial discounts to bring the sale price below those figures. Otherwise, those models might sit on the lot for a long time as slightly less expensive substitutes are preferred.
What I told my friend, I will tell you. Unless you are desperate to acquire an EV now, it will behoove you to wait until after January 1st. If you have the luxury, you might considering waiting until summer, when other models will become available. The Ford Mustang Mach-e appears to be available for order now with delivery in 6 months, but if you can wait until late 2023, it might be eligible for the full $7,500 as they move battery manufacturing to North America. Cadillac Lyric orders have been filled for 2023. Selection and availability in 2024 should be better. But this is no solace for those looking to buy an EV now or in the near future.
Secondly, I haven’t talked about the LEAF, which we own and enjoy. Going forward, I cannot recommend it unless you are expecting to never take it on longer trips. The ChAdeMO standard DC Level 3 high speed charger on the LEAF is simply not going to be supported in the future in the US. The CCS standard appears to be the one that the Federal Government will support, as telegraphed in its infrastructure grant rules. All of the other vehicles mentioned above use the CCS standard, with the exception of Tesla, who has held to its Supercharger Standard (renamed the North American Charging Standard). Even Telsa is softening as it is now also offering a CCS adapter.
And lastly, make sure to see what’s in the final IRS rules and regulations, and possibly what the lame-duck Congress is going to do. There appears to be some jockeying around whether some companies might be grandfathered in on assembly and battery manufacture.
So, thank you Charles Dodgson for the verbal tools to be able to explain the current EV landscape. It’s a shame he isn’t around. I’m sure he’d have something wondrous to say.