Electric vehicle tax credit rules create ‘consumer chaos’

Designed to accelerate the shift to electric cars among other climate goals, the Cut Inflation Act has in practice made buying these vehicles much more complicated.

In August, the law excluded the full $7,500 tax credit for electric vehicles and plug-in hybrids assembled outside of North America. This can make it harder for consumers to make the financial or psychological leap to buying a battery-powered car.

The Treasury Department further tightened those rules this week by requiring that a certain percentage of car battery components and minerals come from the United States or countries that are its trade allies — numbers that will increase over time.

Only 11 electric cars from four automakers – Tesla, General Motors, Ford Motor and Volkswagen – are now eligible for the full tax credit; many others can get a partial credit of $3,750. The list is expected to grow as more automakers reconfigure their supply chains.

The rules are already driving big changes in the buying and selling of electric cars. Some automakers whose models are no longer eligible are now pushing leased electric cars. This is because the law allows leased vehicles to be considered commercial vehicles, which the Cut Inflation Act exempts from the restrictions that apply to cars purchased by individuals.

For many car buyers, the availability of the tax credit is essential. Prices for electric vehicles have fallen in recent months, but they still cost $58,940 on average in March, nearly $11,000 more than a typical new car, according to Kelley Blue Book.

Ethan Derner of Portland, Oregon, and his fiancée, Lorien Sekora, share two Kia electric cars. Mr Derner had considered replacing his car with a new model that could go further on a charge, but he gave up after realizing the vehicles he wanted were either too expensive or no more practical than his current car. He has extended the lease of his Kia Soul and is waiting for more affordable models that can benefit from a tax credit.

“The only other model I’m considering now is a Rivian, but that’s out of my price range,” Derner said. Rivian’s electric luxury models like the R1T pickup truck and R1S SUV are built in Illinois and are eligible for a $3,750 credit.

“Until I can drive to Seattle and back without anxiety,” Mr. Derner added, “I’m not going to buy a new electric vehicle right away.”

His experience is common. About 80% of electric vehicle buyers recently surveyed by Cars.com said tax credits played a big role in their decision to buy an electric car and the vehicle they were considering buying.

Many industry experts and consumers hailed the law’s multi-pronged mission to reduce greenhouse gas emissions, create jobs in the United States and blunt China’s dominance in batteries. and mineral processing. Since President Biden took office, automakers, battery companies and other companies have announced plans to spend more than $100 billion to electrify the US auto industry.

Still, the rules could hamper the goal of getting more people to buy electric vehicles, at least for the next few years.

“They made it complex for a reason, but in the meantime it’s creating all kinds of chaos for consumers,” said Chris Harto, senior policy analyst for Consumer Reports. “In the short term, this will absolutely hurt businesses that aren’t eligible and help businesses that are.”

Revamped credits appear to be particularly difficult for Hyundai Motor, which also owns the Kia and Genesis brands.

Models like the Hyundai Ioniq 5 and Kia EV6 have won industry accolades and wowed buyers with attractive designs and some of the fastest charging times of any electric car. But they are built in South Korea and therefore do not qualify for any federal tax relief.

Even though sales of all Hyundai and Kia cars jumped in the first three months of the year, the brands’ electric vehicle sales fell more than 25%, according to Kelley Blue Book. Overall, electric car sales hit a new record high in the first quarter, surpassing one million cars in 2023, and now account for 7.2% of all new cars sold.

Credit rules have changed rapidly. Last month, Genesis’ first US model, the Electrified GV70 sport utility vehicle, began rolling off a Hyundai line in Alabama after 16 hours of assembly. Genesis executives had hoped the model might get credit, but the car failed to meet tougher rules the Biden administration released this week.

To make up for the loss of tax breaks, Hyundai and other automakers are trying to entice buyers through leases. According to the administration’s broad interpretations of the law, leased electric cars are eligible for tax credits even if they are manufactured overseas and are not subject to government rules on sourcing requirements for battery components and minerals, household income ceilings and vehicle price thresholds.

Auto dealers can pass trade credit on to consumers by lowering the price of the car in lease transactions, which could lower monthly payments. According to auto finance rules of thumb, applying the full $7,500 credit to a lease could save consumers about $225 per month over three years, or $125 per month over five years, said Russell Datz. , a Volvo spokesperson.

Volvo, which is based in Gothenburg, Sweden, sells two electric models in the United States that are manufactured in a factory in Belgium and are not eligible for federal tax credits. The automaker will begin assembling a new SUV, the EX90, at its South Carolina plant this year.

Consumers get the money-saving message. In September, after the law was passed, only 7% of consumers rented an electric vehicle, according to Edmunds.com. In March, leases accounted for 34% of the electric car market.

Gary Murphy, a retired educator from Castle Rock, Colorado, rented an Ioniq 5 in February from a dealer who learned about trade credit the day before.

“We had no intention of renting a car,” Mr. Murphy said. “But when they confirmed you can get $7,500 on a lease, or buy nothing, that’s too big an incentive to pass up.”

Before finding the Ioniq 5, he waited for months for three different electric models, which were rare. When the cars were available, many dealers charged several thousand dollars more than the manufacturers’ suggested retail prices.

“You can get the credit, but you can’t get the car,” Murphy said.

The use of credits for leased vehicles has angered some automakers and lawmakers who say it defeats the intent of Congress. Consumers can lease any electric vehicle for the $7,500 credit. For example, a couple earning more than $300,000 – the married income limit for the tax credit – can lease a $148,000 Mercedes-Benz AMG EQS and claim a $7,500 credit even though the car is made in Germany and far exceeds the $55,000 price cap. for electric sedans to qualify for the credit.

Treasury officials said their decision to allow a tax credit for leased cars was legally sound. The Inflation Reduction Act exempted commercial vehicles from the restrictions to encourage car rental companies, local governments and other car and truck fleet owners to purchase electric vehicles.

Of course, many consumers prefer to buy and own cars, in part to avoid lease limits on how much they can drive and penalties for excessive wear and tear.

José Muñoz, general manager of Hyundai and Genesis Motor North America, insists that the loss of buyer credits puts his brands at a disadvantage in the market. But Hyundai National Dealer Council Chairman Kevin Reilly said models like the Ioniq 5 and Ioniq 6 would remain competitive despite their financial handicap.

The Ioniq 6, which recently went on sale, is the longest-running and most energy-efficient consumer electric car in the United States. It can travel up to 361 miles on a full charge and gets the equivalent of 140 miles per gallon, according to the Environmental Protection Agency.

“I think our customers will be evaluating the whole landscape, not just whether an EV qualifies for a credit,” said Mr. Reilly, owner and president of Alexandria Hyundai in Virginia.

Mr Reilly said renting offered other benefits. People anxious about switching to battery-powered cars can try one out without long-term commitment or worry about resale value. And as EV technology advances and more affordable models come to market, customers can easily upgrade when their lease is up.

Still, some car buyers said they would only buy electric cars that qualify for the tax credits because they support the Act’s goals of cutting inflation.

Jonathan Quarles, a Detroit entrepreneur, said he spends more than $150 a week filling up a Ford Expedition to ferry his three daughters around town. He’s considering replacing it with an electric Ford Mustang Mach-E, which qualifies for a $3,750 federal tax credit. After watching manufacturing jobs leave the country for decades, he said, he has little sympathy for automakers whose cars don’t qualify for credits.

“My view is,” he said, “you should have built those factories long before the credit.”