The US government has shelved its planned implementation of more stringent sourcing requirements for electric vehicles to obtain the $7,500 federal tax credits, the Wall Street Journal reported on Friday.
The final rule
The US Department of the Treasury and Internal Revenue Service (IRS) updated the electric vehicle tax credit rules on May 3, 2024.
Fortunately, the new rules enabled more electric vehicles to qualify for the federal tax credits under the Inflation Reduction Act.
In hindsight, the US government had originally planned to exclude any electric vehicle using China-sourced graphite in the battery pack from the list of eligible models beginning in 2025.
However, the final rules delayed that stricter requirement until 2027. The US government recognized the fact that most of the world’s graphite comes from China.
Considering the complexity of tracing graphite, American suppliers require more time to build up capacity.
The extension should enable more EVs to maintain their federal tax credit eligibility in the next three years as the requirements for critical minerals and battery components are increasing every year:
Eligible models
New sourcing requirements excluded more electric vehicles from the federal tax credit list in January 2024. These EVs are produced outside the US or built with too much China-sourced battery materials.
As of today, only 22 out of the 104 electric vehicles in the US market benefit from the IRA’s federal tax credits. Only 9 EVs out of those 22 are eligible for the full $7,500 tax credit. The other 13 EVs only get $3,500 off the purchase price.
However, all EVs can access the $7,500 credit through the leasing loophole.
Challenging China’s dominance
The US government leverages these sourcing requirements primarily to prevent “foreign entities of concern” from benefitting from the federal tax credits.
It is a crucial part of the US efforts to establish its homegrown supply chain to challenge China’s dominance.
China is currently the world’s largest electric vehicle market. Industry experts perceive China to house the most competitive localized supply chain. However, the US government refuses to rely on Chinese companies for critical mineral supplies like graphite.
Now that the new rules are official government policy, they will undergo litigation and revision. Inflation Reduction Act key author Senator Joe Manchin (W-VA) contended that the new rules would utilize taxpayers’ money to benefit Chinese firms. According to Politico, the Senator vowed back lawsuits by “any entity that has been negatively impacted by the illegal implementation of the law to restore the goal of domestic opportunity and security,” and usher a Congressional Review Act resolution to amend them.
