How the Inflation Reduction Act’s new EV tax credit affects consumers and automakers

The Inflation Reduction Act signed into law by President Biden contains the federal government’s largest-ever investment in fighting climate change.

That includes encouraging the use of electric vehicles by extending a $7,500 tax credit for consumers who buy a new EV, $4,000 for those who purchase a used one.

Some call it a big win for the auto industry. But automakers fear the new law could drive customers away from electric vehicles initially.

The legislation demands that car companies quickly create a new supply chain, which steers away from relying on countries like China.

John Bozzella, president and CEO of the Alliance for Automotive Innovation, which represents most major automakers, says the new law takes effect at an especially sensitive time for the burgeoning electric vehicle industry.

Listen: How the Inflation Reduction Act could make it harder to convince consumers to buy EVs.

WDET’s Quinn Klinefelter spoke with John Bozzella of the Alliance for Automotive Innovation about the Inflation Reduction Act’s EV tax credits. Read an excerpt of their conversation, edited for brevity and clarity, below.

John Bozzella, president and CEO, Alliance for Automotive Innovation: This next five years, in my view, is critical to the transformation. We are at about 6% of new electric vehicle sales today as we look at the marketplace. And if we want to get to, say, 15 or 20% in the next few years and 40-50% by the end of the decade, we need to appeal to a much broader segment of the buying public with greater numbers of models at all segments, and at all price points.

Quinn Klinefelter, WDET News: And you think the Inflation Reduction Act is going to limit that?

In the near term it will. The tax credit that the new act replaces was really designed to encourage consumers to purchase an electric vehicle, to become more aware and to get into that vehicle, kick the tires and drive it away. This new tax credit is really designed for a separate purpose. And that purpose is to really reduce the industry’s reliance on China for critical minerals, raw materials and battery components. It’s a different goal. And, by the way, that’s a goal that the auto industry absolutely supports. But because there are significant hurdles that manufacturers need to get over in order for those vehicles to qualify, it’s going to take a few years, I think, before a broad number of consumers will see this tax credit available to them.

The full $7,500 tax credit is available, I think, for the next year or so. Correct?

It depends on what vehicle and it depends on which consumer. So already we’ve added a significant amount of complexity to the marketplace. Vehicles that are not made in North America will no longer qualify. The new act has income requirements and vehicles over a certain price wouldn’t qualify. Some of those provisions begin immediately, then others take effect over the next few years. Additional requirements related to percentages of raw materials and battery components that must come from North America or allies with whom we have free trade agreements are significant hurdles that manufacturers will work to get over so that vehicles can further qualify.

Do you foresee that consumers are going to grasp this enough that there might be some kind of a rush over the next year at least to try to buy electric vehicles while they can still get all of this credit?

I think the attention that’s being given to the tax credit will create some near-term interest. And I do think people who are in the market now for an electric vehicle might very well rush to their dealership and make sure that they understand what might be available to them. Look, EVs are the future of personal mobility in the United States. And so I do think the long-term future of this transition is bright, despite maybe some confusion in the marketplace in the near term.

Is there confusion among automakers, those you represent? For some companies like Ford, they built a new plant recently and they’ll be assembling things in America but they’re still using parts from China. The federal government, as you said, has been pushing to try to get things built in the U.S. They put the semiconductor bill out recently that had that in it. Now they have this Inflation Reduction Act that has similar provisions. U.S. Transportation Secretary Pete Buttigieg, for one, was saying, “Well, you know, sometimes industry, they can move faster than they really think they can.” In your view, do you think automakers need these provisions to push them to act more quickly?

Automakers are already moving to build more resilient supply chains outside of China. That’s not the question. The question really is: What beyond the auto industry needs to change? How quickly, for example, are we able to permit mines for these critical raw materials here in the United States? Are we able to partner with allies? And is there a broad enough list of allies beyond free trade agreement partners for us to be able to move quickly beyond China? So the challenge here is a lot beyond the control of the auto industry has to happen and has to happen quickly in order for these deadlines to be met.

On the other side, do you think the federal government, with all the expertise that it has available, is not quite understanding how difficult it may be to take supply chains that have been in place for a long time and suddenly move that train in a different direction?

You know, policymakers have to make decisions. And sometimes they make decisions with imperfect information. That might be the case here. Or what also might be the case is that the policymakers that designed this particular credit might have felt comfortable with the idea that the credit might not be available for a significant number of consumers in the near term while this transformation to electric vehicles takes place. In my view, that’s a missed opportunity.

Photo credit: Godofredo A. Vásquez/AP