Designed to accelerate the shift to electric cars in addition to other climate goals, the inflation cut bill has in practice made buying such vehicles a lot 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. That can make it more difficult for consumers to take the financial or psychological leap to buy a battery-powered car.
The Treasury Department further tightened those rules this week by requiring a certain percentage of the components and minerals in car batteries to 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; several others may qualify for a $3,750 partial credit. The list is expected to grow as more automakers reconfigure their supply chains.
The rules are already causing major changes in the purchase and sale of electric cars. Some automakers whose models are no longer eligible are now pushing electric lease cars. That’s because the law allows leased cars to be classified as commercial vehicles, which the Inflation Reduction Act exempts from the restrictions placed on cars purchased by individuals.
For many car buyers, the availability of the tax credit is critical. Electric vehicle prices have fallen in recent months, but they still averaged $58,940 in March, nearly $11,000 more than a typical new car, according to Kelley Blue Book.
Ethan Derner of Portland, Oregon, and his fiancé, Lorien Sekora, share two Kia electric cars. Mr. Derner had considered replacing his car with a new model that could go farther on a charge, but gave up when he realized 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 qualify for tax relief.
“The only other model I’m considering right now is a Rivian, but it’s out of my price range,” said Mr Derner. Rivian’s luxury electric models, such as 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 worry,” added Mr. Derner, “I’m not going to buy another electric car right away.”
His experience is general. About 80 percent of people looking to buy an electric car, recently polled by Cars.com, said tax credits played a big part in their decision to buy an electric car and the vehicle they planned to buy .
Many industry and consumer experts have praised the law’s multi-faceted mission to curb greenhouse gas emissions, create jobs in the United States and flatten China’s dominance in batteries and mineral processing . Since President Biden took office, automakers, battery and other companies have announced plans to spend more than $100 billion to electrify the US auto industry.
Still, the rules could get in the way of the goal of getting more people to buy electric vehicles, at least for years to come.
“They’ve made it complicated 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, it will absolutely hurt the companies that aren’t eligible and help the companies that are.”
The rescheduled credits appear to be a particularly hard blow for Hyundai Motor, which also owns the Kia and Genesis brands.
Models such as the Hyundai Ioniq 5 and Kia EV6 have won industry awards and impressed buyers with attractive designs and some of the fastest charging times of any EV. But they’re built in South Korea, so they don’t qualify for federal tax breaks.
Even as sales of all Hyundai and Kia cars rose in the first three months of the year, sales of the brand’s electric vehicles fell more than 25 percent, according to Kelley Blue Book. Electric car sales overall rose to a new record in the first quarter, at a rate of more than a million cars by 2023, and now account for 7.2 percent of all new car sales.
Credit rules are changing rapidly. Last month, Genesis’ first American-built model, the Electrified GV70 SUV, began rolling off a Hyundai line in Alabama after 16 hours of assembly. Genesis executives had hoped the model would qualify for a credit, but the car did not meet the stricter 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 lease deals. Under the administration’s broad interpretations of the law, leased electric vehicles are eligible for tax credits even if they are foreign-made and are not subject to government rules regarding battery component and mineral procurement requirements, household income caps, and thresholds for vehicle prices.
Car dealers can pass on the commercial credit to consumers by lowering the price of the car in lease transactions, which can reduce monthly payments. According to auto financing rules of thumb, applying the entire $7,500 credit to a lease could save the consumer about $225 a month for three years, or $125 a month for five years, said Russell Datz, a Volvo spokesman.
Based in Gothenburg, Sweden, Volvo sells two electric models in the United States that are made in a factory in Belgium and are not eligible for federal tax credits. The automaker will begin assembly of a new SUV, the EX90, at its South Carolina plant this year.
Consumers get the money-saving message. In September, following the passage of the law, only 7 percent of consumers rented an electric car, according to Edmunds.com. In March, leasing contracts accounted for 34 percent of the electric car market.
Gary Murphy, a retired teacher in Castle Rock, Colorado, rented an Ioniq 5 in February from a dealer who learned about the commercial credit the day before.
“We had no plans to lease a car,” said Mr. Murphy. “But when they confirmed you can lease $7,500 or buy nothing, that’s too much of an incentive to pass up.”
Before tracking down the Ioniq 5, he waited months for three different electric models, which were in short supply. When cars were available, many dealers demanded several thousand dollars more than the manufacturer’s suggested retail prices.
“You can get the credit, but not the car,” said Mr. Murphy.
The use of lease car credits has angered some automakers and lawmakers, who say it undermines 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 was made in Germany and the $148,000 price limit 55,000 far exceeds for electric sedans to qualify for the credit.
Treasury officials have said their decision to grant a lease car tax credit is legally sound. The Inflation Reduction Act exempted commercial vehicles from the restrictions to encourage rental car 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.
José Muñoz, the CEO of Hyundai and Genesis Motor North America, insists that the loss of buyer credit puts its brands at a huge disadvantage in the marketplace. 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 most energy-efficient, longest-range electric vehicle in the United States. According to the Environmental Protection Agency, it can go up to 361 miles on a full charge and gets the equivalent of 140 miles per gallon.
“I think our customers will be assessing the entire landscape, not just whether an EV qualifies for credit,” said Mr. Reilly, the owner and president of Alexandria Hyundai in Virginia.
Mr Reilly said leasing offered other benefits. People who are afraid of switching to battery-powered cars can try one without a long-term commitment or worry about resale value. And as EV technology advances and more affordable models enter the market, customers can easily upgrade when their lease term expires.
Still, some car buyers said they would only buy electric cars that qualify for tax credits because they supported the goals of the Inflation Reduction Act.
Jonathan Quarles, a Detroit entrepreneur, said he spent more than $150 a week filling a Ford Expedition to transport his three daughters across the city. He’s considering replacing it with an electric Ford Mustang Mach-E, which qualifies for a $3,750 federal tax credit. After decades of seeing manufacturing jobs leave the country, he said, he has little sympathy for automakers whose cars didn’t qualify for credit.
“My perspective is,” he said, “you should have built those factories long before credit.”
