Automakers Say New Electric Car Rules Are Too Restrictive

When the Inflation Reduction Act of 2022 was signed into law in August, it was heralded as a panacea to climate change and giving a boost to the sales and production of electric vehicles (EVs).

Rulemaking from the U.S. Department of Treasury has settled on up to $7,500 in new tax credits for buyers, removal the 200,000-unit tax credit limit for automakers and funds allocated for related EV infrastructure (chargers and a stronger power grid). The bill also caps the eligibility of individuals to receive a tax credit for their purchased based on the earnings of the buyer and the total cost of the vehicle.

There are three major points of contention that are hindering automakers as they adapt to the new U.S. EV landscape: battery component requirements, buyer income limits and the bar for manufacturers suggested retail price (MSRP).

Rules currently in place state that battery components, including critical minerals like lithium and graphite, need to be sourced responsibly, though it allows manufacturers time to develop the necessary capability to certify compliance throughout their supply chains.

The bill says that a vehicle placed in service before January 1, 2024 has to have 50 percent of its components (including minerals) come from countries with "free trade agreements" with North America. It increases 10 percent per year to 100 percent for vehicles bought in 2029.

It also has an exemption on those minerals if the battery is recycled in the United States.

"Legislation is a messy process that always involves many priorities and never makes everyone happy. But this one is particularly messy. Buyers, dealers, and even automakers are working to understand it and that's a moving target because the requirements controlling where things are built and mined ladder up over time," Sean Tucker, senior editor at Kelley Blue Book told Newsweek.

"The most direct harm we've seen is to Hyundai and Kia, who have some very well-reviewed new EVs (the Hyundai Ioniq 5 and Kia EV6) that started to gain sales traction and saw their sales fall when the new requirements kicked in," he said.

There are currently 20 countries that have free trade status with the U.S. including Canada, Mexico, Australia, Israel. Neither the European Union nor Japan have free trade designation with the U.S., but a Department of Treasury spokesperson told Newsweek that the Treasury and the IRS can propose new countries during the rulemaking process.

Japan, which has a Critical Minerals Agreement with the U.S. and likely most of Europe are likely to be considered.

The Department of Transportation notes that materials can't come from a "foreign entity of concern," which means a foreign terrorist organization or an entity owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is a covered nation (Russia, China, Iran, North Korea and others).

When approached by Newsweek, Toyota wouldn't officially comment on its issues with the IRA (none of its vehicles are currently eligible for the tax credit) but pointed to a statement from Autos Drive America, an organization that advocates for "open trade investment policies".

The statement says that the proposed guidance on critical minerals, "continues to highlight the challenges ahead for U.S. automakers' electrification efforts and consumers' adoption of clean vehicles. The number of vehicles eligible for even a partial tax credit has been significantly reduced, slowing adoption of electric vehicles, under the new rules."

General Motors has been proactive in sourcing those raw materials, striking a deal in January with Lithium America and its proposed mine in Thacker Pass in northern Nevada. The Detroit-based automaker invested $650 in the project that could be producing the element for batteries by 2026.

Controlled Thermal Resources is plotting a lithium extraction business on the Salton Sea in California, which it claims has generations-worth of the element. Stellantis, parent company to the Jeep, Ram, Dodge and Chrysler brands in the U.S., has already committed to buying some of the product.

The final assembly requirement means the EV has to be finished at a plant here in the U.S., and will be delivered from there to a dealer ready for sale. That puts automakers like BMW and Mercedes at a disadvantage.

Both German manufacturers have plants in the United States, but the battery-powered BMW i4 and iX are assembled in their home country, as are the Mercedes EQS and EQE electric sedans. However, the plug-in BMW X5 xDrive50e is built at its Spartanburg, South Carolina plant and will be eligible for $3,750 of the $7,500 available credit.

"BMW does not base our long-term strategic decisions on political incentives because these are often more short-term in nature," Phil Dilanni, BMW Corporate and Business Communications Manager told Newsweek. "However, we do believe that it will be difficult for vehicle manufacturers to meet the supply chain requirements, both in terms of content and timeline."

Last October BMW said it will be investing $1.7 billion at Spartanburg to prepare for more electric vehicles. It's also building a new U.S. battery assembly facility in Woodruff, S.C. The company says it will build at least six fully electric models in the U.S. by 2030.

Rules on buyer income have been instituted as well. The new section of the bill says that that the threshold amount for collecting the credits in the case of a joint return is $300,000, in the case of a head of household is $225,000, and in the case of any other taxpayer, $150,000. This is to make sure middle-class folks aren't left out of the EV revolution.

Finally, a cap on the cost of the vehicle was instated, knocking many of the luxury automakers off the list. Cars over $55,000 no longer qualify, nor do trucks, vans and sport utility vehicles (SUVs) costing more than $80,000. That put the Cadillac Lyriq EV in, but the range-topping, forthcoming Celestiq out. Many BMW, Audi and Mercedes EVs are out as well.

Tesla recently lowered its price points to get the Model 3 and Model Y under the MSRP limit.

The average new price of an electric vehicle at the end of 2022 was almost $62,000, meaning the "average" electric car doesn't technically qualify for any tax credits. Still, the consensus among automakers is that the Inflation Reduction Act is a net positive for the electric car market, but the implementation, especially for automakers not based in the U.S., has been gerrymandered towards American companies.