Biden reignites furor over electric vehicle tax credits

The Biden administration is walking a tightrope attempting to dole out new, hefty tax credits for electric vehicles in a way that makes climate hawks, automakers and foreign trade allies happy.

The Treasury Department’s new tax guidance, released after months of delay, failed to satisfy any of them. They still want more EV models to qualify for up to a $7,500 tax credit, which is awarded to buyers.

The tax credits were created in the Democrats’ tax-and-climate spending law known as the Inflation Reduction Act, or IRA. The chief architect of that legislation, Sen. Joe Manchin III of West Virginia, remains furious about how it’s panning out.

He accuses the administration of subverting the law’s intent for EVs to be sourced and manufactured in North America by proposing flexible tax rules that broaden the list of qualifying foreign countries for credits amid tensions with trade partners. He’s threatening legal action against the administration and fears they might “try to screw me” over implementing the EV credits.

“American tax dollars should not be used to support manufacturing jobs overseas,” Mr. Manchin said. “It is a pathetic excuse to spend more taxpayer dollars as quickly as possible and further cedes control to the Chinese Communist Party in the process.”

Since the start of this year, EV buyers have received the full $7,500 credit for qualifying vehicles regardless of where the parts are sourced because Treasury failed to impose rules by a Dec. 31 deadline.

That is coming to an end with Treasury’s long-awaited guidance that begins to crack down on qualifications on April 18. It leaves some portions unanswered and is subject to change in June after a 60-day comment period concludes.

The IRS says nearly two dozen EV models currently qualify, a number that automakers warn is set to dwindle after the new rules take effect later this month.

A monthly list of qualifying vehicles will be posted monthly by Treasury starting April 18.

In response to the new rules, Ford Motor Company this week urged customers to drive off the lot with one of their new EVs before April 18 if they want to receive up to the full tax credit. Marin Gjaja, chief customer officer for Ford’s EV lineup, said he hopes the “new incentive eligibility will help even more Americans join the EV revolution.”

To qualify for the tax credit, the electric vehicle must be assembled in North America and the retail price cannot exceed $80,000 for vans, trucks or SUVs, or $55,000 for any other EV.

The EV batteries must be manufactured in North America starting in 2023 at 50% and rising incrementally until 100% in 2029. The battery critical minerals must be sourced from North America or a free trade agreement partner starting in 2023 at 40% and rising incrementally to 80% in 2027.

Only half of the full credit — $3,750 — will be offered if either the critical mineral or battery components are not met.

Treasury is proposing an expansion of which countries meet the definition of a free trade agreement partner in an effort for more qualifying EV models, including “newly negotiated” deals like that with Japan for critical minerals. The move has stoked the ire of lawmakers from both sides of the aisle who say the administration needs congressional approval for trade matters.

“The administration is proposing more than guidance around a clean vehicle tax credit, it is redefining a free trade agreement,” said Rep. Earl Blumenauer, Oregon Democrat and ranking member on the House Ways and Means Trade Subcommittee.

U.S. allies in Europe are in a wait-and-see holding pattern. The European Union’s trade chief, Valdis Dombrovskis, said at a recent event they’re “currently discussing with the U.S. the exact content and the potential legal procedures,” according to Politico.

EVs also may not include parts or minerals from a “foreign entity of concern,” which could mean countries like China, Russia and Iran. The Treasury has not yet defined this phrase.

The domestic sourcing requirements insisted upon by Mr. Manchin were born out of China’s dominance over the critical mineral supply chain crucial for EV batteries. The communist nation controls 60% of the globe’s total rare Earth elements production, according to the International Energy Agency.

A handful of EV models are expected to qualify once Treasury begins a running list, and it remains to be seen if automakers will be able to qualify even with the relaxed rules as the sourcing eligibility tightens incrementally each year.

The new law includes funding to expand U.S. mining operations, but Treasury opening the door for more foreign trade partners means more competition abroad.

John Bozzella, president and CEO of the auto-industry group Alliance for Automotive Innovation, predicts EV sales may have peaked over the past year and may begin to decline thanks to the tax credit eligibility requirements.

“March 2023 was as good as it gets,” Mr. Bozzella wrote in a blog post.

EV sales hit record marks in 2022, according to Mr. Bozzella’s group. EVs accounted for 8.5% of automobile sales in the final three months of 2022 and 10% in December. There will be an estimated 150 EV models by 2026.

Rep. Dan Kildee, a Democrat who hails from the auto-industry state of Michigan, spoke carefully on the administration’s implementation but emphasized it needs to follow the law.

“It is important that the Biden administration follow the intent of Congress when it is implementing this new law,” Mr. Kildee. “I look forward to continuing to work with the Treasury Department to support American auto workers so we can make more electric vehicles in Michigan, not China.”

Critics said the administration is flouting its own law but argue it should come as no surprise for folks like Mr. Manchin.

Sen. Mike Crapo of Idaho, the top Republican on the Senate Finance Committee, said the “ever-changing and late” tax guidance “has once again failed to follow through on promises that minerals and components sourced from China would be barred from electric vehicles qualifying for the tax credit.”