Automakers have long pushed for an extension of existing electric vehicle (EV) tax credits that expire once an automaker sells 200,000 units. However, the $430 billion Inflation Reduction Act of 2022 signed by President Biden restructures the $7,500 EV tax credit and adds a new $4,000 rebate for used EVs. But the measure renders most of the American electric, plug-in hybrid, and fuel-cell vehicles ineligible as of the bill's signing, according to The Alliance for Automotive Innovation, a trade group that represents various automakers.

What the new law says

To be eligible for an EV tax credit, a car must have a manufacturer's suggested retail price (MSRP) of less than $55,000, trucks and SUVs must be under $80,000, and used cars no more than $25,000. In addition, income restrictions limit credits to modified adjusted gross incomes of less than $150,000 annually for single buyers or up to $300,000 for families and couples. For an automaker's vehicle to be eligible for a tax credit under the new law, a vehicle's final assembly location must be in North America, defined as the United States, Canada, or Mexico.

Further, by 2024, 40% of a battery pack's key materials must be obtained from or processed in the United States or a nation with a valid free-trade agreement with the United States or from waste materials recovered and recycled in North America. That number grows to 80% by 2027 and 100% by 2028. In addition, before 2024, 50% of a battery's parts must be manufactured or assembled in North America; by 2027, this percentage will rise to 80% before reaching 100% the following year.

China currently produces 81% of the world's battery cathodes, refines 75% of the world's cobalt, and processes 59% of the world's lithium, according to Benchmark Mineral Intelligence. With substantially lower cathode capacity for batteries, the US and Canada together process only 3% and 3.5% of the world's lithium and cobalt, respectively.

How this affects automakers 

Some of the old rules remain in place as new ones take effect, and others have not yet been implemented. For example, the requirement that any car receiving a tax credit must undergo final assembly in North America is now in force. While others, like those requiring battery minerals and components sourced from North America or countries participating in free trade, won't go into force until Jan. 1, 2023.

According to the U.S. Dept. of Energy, 2022 model year vehicles eligible for the Clean Vehicle Credit tax credit under The Inflation Reduction Act of 2022 include vehicles made by BMW, Ford, Lucid, Mercedes-Benz, Nissan, Rivian, Stellantis, Volkswagen, and Volvo. But other automakers have brands and models that no longer qualify, particularly because of where they're built. So, while the Audi Q5 Plug-In Hybrid qualifies because it's made in Mexico, the Audi e-tron EV line -- and some Porsche and Volkswagen models -- do not.

GM and Tesla are not eligible for 2022 because they have sold more than 200,000 units, a requirement that goes away in 2023. Other automakers with vehicles currently ineligible for tax credits include BMW, Hyundai, Jaguar Land Rover, Kia, Mazda, Polestar, Subaru, Toyota, Volkswagen, and Volvo.

However, the tax credit is still applicable under the old standards if a consumer enters into a legally binding contract to buy an eligible car before August 16 but has not yet accepted delivery, according to the IRS.

But there are several reasons to believe the tax credit could have little effect. Despite the lack of incentives and the rising prices, Tesla has enjoyed robust sales, becoming the top luxury automaker in the United States in 2022. Meanwhile, the average price of an EV enables current buyers to afford such a vehicle without an incentive. According to Kelley Blue Book and Cox Automotive, the average transaction price paid for a new EV in July 2022 was more than $66,000, topping the average price of $65,530 for a luxury vehicle in the same month, most of which are bought without tax incentives.

Short term, automakers are building every vehicle possible due to semiconductor shortages, so don't expect a surge in sales from any automaker. But with the new calendar year, GM and Tesla will be eligible for tax incentives once more, but what it means for other automakers remains unclear. The models eligible for a tax credit in 2022 are not guaranteed eligible in 2023. Neither the Department of Energy nor the IRS has released advice for that year.

If anything, the lack of incentives for most EVs means government largesse may have increasingly little effect on automaker EV sales until more affordably priced vehicles reach the market, produced with U.S. guidelines in mind. Given that it takes three to five years to develop a new vehicle, find new sourcing, or build an American-based plant, don't expect the situation to change rapidly.

However, since GM and Tesla already have plans, it's worth watching to see whether it gives them a leg up on their competition.