Inflation Reduction Act complicates EV incentives

The newly signed Inflation Reduction Act (IRA) has been lauded as a major milestone for fostering consumer adoption of electric vehicles (EV), but a closer look reveals it may, in the short term, further complicate matters, making it difficult to know which EVs are eligible for federal incentives and putting the onus on the consumer to navigate which EV credit their purchase qualifies for under federal and state guidelines. Most EV incentives are unlike incentives on internal combustion engine (ICE) vehicles , which are offered by manufacturers at the point of sale. Conversely, EV incentives are usually implemented through after-sale rebates put in place by legislation at the federal and state levels, by environmental agencies or by local electric companies. “The incentives are there to incentivize the adoption of new technology for the purposes of reducing the impact of transportation on the climate,” said Kevin Favro , co-founder and co-chief executive of EV Life , a platform that puts EV incentives in one, easy-to-access place to connect the lender and consumer with applicable incentives to include at the point of sale. As incentives change, EV adoption is gaining traction in rural areas of the U.S., where it has historically been limited due to shortcomings in infrastructure and high sticker prices. In fact, Mississippi, Hawaii and Utah tallied the largest growth in alternative fuel vehicle share in 2022 compared with 2014, according to a study conducted by iSeeCars , an online automotive search engine and research website. With growing EV demand, the complexity of legislation at the federal and state levels makes it difficult for the consumer to know which incentives they qualify for when purchasing a vehicle, and acts as a roadblock for consumers looking to make the jump to electrification. Incentives at the federal level Signed into law by President Joe Biden on Aug. 16, the IRA adds EV incentives in the long term but temporarily cuts back on which vehicles qualify for federal incentives, making it complicated for the consumer, Matt Degen , editor at Cox Automotive , told AFN . Prior to the IRA, an OEM ’ s first 200,000 EV units sold qualified for a $7,500 rebate. But once a manufacturer reached that threshold, the tax credit was no longer available for vehicles from the that manufacturer. The cap is now set to be lifted Jan. 1, 2023 , per the IRA. While General Motors , Tesla and Toyota have all hit the threshold, GM’s Cadillac and Chevrolet EV offerings, and Tesla’s Model 3 and Model Y vehicles , will once again be eligible for the full $7,500 tax credit when the 200,000-vehicle limit is lifted at the start of the new year. Additionally, all three Ford Motor EV offerings, the Nissan LEAF, the Mercedes-Benz EQS SUV and Rivian ’s EVs qualify for the full credit under these guidelines. Notably, Toyota will not apply for the federal tax credit since its EVs are not manufactured in the U.S. Despite the removal of that threshold, the IRA eligibility terms regarding North American supply and production decreases the number of EVs eligible for the new Clean Vehicle Credit, Degen said. “There are all these stipulations about where the vehicles are made, even the components of their batteries — where that material is sourced from,” Degen said. The federal tax credit is going to end for about 70% of the 72 models that were previously eligible, according to a report from Washington, D.C.-based trade association and lobby group Alliance for Automotive Innovation. Parsing out production location and material sourcing As time goes on, where the vehicle is assembled and where those material are sourced from will be a major consideration for which EV models qualify for the Federal tax credit, Degen said, noting that f or vehicles to qualify for the $7,500 tax credit, the final assembly of the new vehicle must take place in North America. This stipulation just went into effect on Aug. 16, 2022 and will affect vehicles purchased through 2032. In addition, the $7,500 is split into two, $3,750 credits that are based on different aspects of the battery. First, 40% of the battery’s critical minerals — lithium, nickel and manganese for example — must be from materials recycled, extracted or processed in the U.S. or any of the 20 countries with a free trade agreement with the U.S., including Australia, Canada and Mexico. The required percentage increases by 10% per year starting in 2024, and 80% of the critical minerals are to be extracted or processed under these guidelines in 2027. To qualify for the second $3,750 credit in 2023, at least 50% of the battery components must be manufactured or assembled in the U.S. The threshold increases to 60% in 2024 and 2025, and then by 10% each year; 100% of the battery must be manufactured or assembled in the U.S. in 2029. Additionally, after Jan 1, 2024, vehicles will not qualify for any of the tax credit if any of the battery components are sourced from China , Russia, Iran or North Korea, and none of the battery minerals can be sourced from those countries after Jan 1. 2025. The IRA will continue to spur action to invest in the domestic production and sourcing of these components that has already started, Degen said. Domestic lithium mining is already happening in the U.S., but there will not be an overnight change in sourcing materials since it could take years to move those operations to the U.S., Degan added. MSRP limits a nd gross income ceiling Limitations on which vehicles qualify for tax credits don’t stop at where they are produced and where the batteries are sourced. There is also a ceiling on the MSRP of the vehicle and a consumer income limit for an EV purchase to qualify for the tax credit, according to Degan. Vans, pickup trucks and SUVs cannot cost over $80,000, and other qualifying vehicles cannot exceed $55,000, according to the IRA. Further, consumer income limits are based on modified adjusted gross income (MAGI) , which is a person’s adjusted gross income after including certain allowable deductions and tax penalties. Joint tax return MAGI cannot exceed $300,000, head-of-household MAGI cannot exceed $225,000 , and an individual’s MAGI cannot exceed $150,000. [caption id="attachment_56407624" align="alignnone" width="2560"] Photographer: Krisztian Bocsi/Bloomberg [/caption] Used EVs may also qualify for tax credit under the IRA, opening the door for more consumers to purchase an EV at a lower price. The credit applied to the vehicle will be $4,000 or 30% of the vehicle value, whichever is lower. The vehicle also cannot cost more than $25,000, must be at least 2 years old at the time of purchase and must be purchased at a dealership. The EV tax credit for a used vehicle will only apply to a vehicle once in its lifetime, so a consumer will not be eligible to get the tax credit if a previous owner already received it. The IRA will not make EVs more accessible for the consumer in terms of affordability right away. When manufacturers meet the guidelines set, there will be more EV options for the consumer to purchase at a slightly reduced price. It is up to the consumer to understand which vehicles qualify for the tax incentive since the credit is not included at the point-of-sale by the manufacturer or lender. Instead, the tax credit is applied after sale through a rebate paid back to the consumer. Incentives at the state level In addition to incentives at the federal level, each state has its own offerings through various programs, local energy companies and environmental agencies, further complicating the EV incentive landscape for the consumer. “Across the U.S. when we get down to the state level, we're seeing more states come online with their own programs,” EV Life’s Favro said. Texas and Illinois recently came out with their own programs while New Jersey reinstated tax credits after exhausting its original funding, he added. "We're seeing more states come online with their own [EV incentive] programs." -- Kevin Favro For example, the Illinois Environmental Protection Agency (IEPA) offers a $4,000 rebate to residents who purchase or lease a new or used EV between July 1, 2022 and June 30, 2026. The rebate lowers to $2,000 between July 1, 2026 and June 30, 2027 and then to $1,000 after July 1, 2028. The IEPA also offers a $1,500 rebate to residents who purchase a new electric motorcycle. California, Colorado, Illinois, Oregon and Vermont are the only states to offer incentives on electric motorcycles. While it is uncommon to see EV incentives applied at the point-of-sale since OEMs do not offer such programs, the Charge Up New Jersey Program offers up to a $4,000 rebate applied at the point-of-sale on zero-emission vehicles based on the price of the EV and the electric range, according to an AFN analysis of state-level incentive programs. California is the only other state to offer a point-of-sale rebate of up to $750 under the Clean Fuel Reward Program . Meanwhile, California and Colorado have some of the highest-dollar incentive offerings. In California, which has 21 rebate offerings, the largest potential offering is distributed by the Bay Area Air Quality Management District , according to Kelley Blue Book . Consumers may be eligible for a rebate of up to $9,500 if they retire a vehicle model older than 2005 and replace it with a hybrid, plug-in hybrid or EV. And in Colorado, where there are only five offerings, state residents can be eligible for a rebate of up to $10,000 on heavy-duty electric trucks, according to the U.S. Department of Energy . Local electric utility companies also offer EV rebates and home charging station rebates. “We’re seeing more and more electric utilities jump in and offer their own incentives, offering free or reduced electric vehicle home chargers, as well as the wiring and installation costs that go into bringing home a charging station,” Favro said. Along with other electric companies across the U.S., customers of Consumers Energy in Michigan can qualify for a $500 rebate to install a Level 2 charging station at home, Otter Tail Power in Minnesota offers a $400 rebate on Level 2 charging stations and Tucson Electric Power in Arizona also offers a $500 rebate for the installation of a Level 2 charger, according to each energy company’s website. But a few states still offer no EV incentives: Hawaii, Idaho, Kentucky, Montana, North Dakota and Wyoming do not offer any tax credits or rebates on vehicles or charging stations. Hawaii does offer discounted EV charging, and Idaho exempts EVs from state-required maintenance programs. EV incentives are increasing at the federal and state levels, but the federal increase will come as more OEMs meet the guidelines for sourcing and production set in the IRA. At the state level, EV rebate offers are growing, and the consumer must navigate the options to figure out where their vehicle qualifies. “I was surprised at how many [EV incentives] are available, but again, it is really on the consumer to go search these,” KBB’s Degen said. “They aren’t secret, but it takes some legwork.” Auto Finance Summit, the premier industry event for auto lending and leasing , returns October 26-28 at the Wynn Las Vegas. To learn more about the 2022 event and register, visit www.AutoFinanceSummit.com .

Inflation Reduction Act complicates EV incentives

Consumers must navigate federal and state EV programs

Porsche IPO moves ahead as parent VW looks to defy market gloom

Listen: Weekly Wrap discussion on shifting dynamics in auto finance

Related Posts

Residence document recycling scam spans seven lenders

AI contributes to 25% rise in fraud losses

How AI is redrawing the edges of risk in auto finance

10 auto finance executives to watch in 2026

Listen: Weekly Wrap discussion on shifting dynamics in auto finance

Stay Informed with Our Newsletters

The Roadmap Podcast

Retrieve your password