Senate moves forward with EV tax credit reform; Tesla (TSLA)

The US Senate is going to move forward with a sweeping new bill after Senator Joe Manchin finally accepted to include investments to curb climate change. The new bill is going to include the long-awaited electric vehicle tax credit reform that is going to give back access to the tax credit to Tesla GM vehicles, along with other changes.

Last year, the US House of Representatives passed the $1.9 trillion “Build Back Better” legislation, but it has been stuck in the divided Senate ever since.

The bill is interesting to the EV community because it includes a long-needed reform to the federal tax credit for electric vehicles.

Even though it is technically a small part of the overall bill, it is a point of contention.

The main goal of the reform, and the one most people agree on, is the need to eliminate the tax credit cap after automakers hit 200,000 EVs sold, since it is putting automakers that were early in pushing electric vehicles at a disadvantage. It also happens that those automakers are American automakers, like Tesla and GM, while many foreign automakers still have access to the credit.

Joe Manchin, a Democrat and senior United States senator from West Virginia, has been holding his vote, which is the deciding vote since the Democrat needs every single one of their votes in the Senate to pass anything.

The senator, who comes from a very conservative state, has proven to be difficult to deal when it comes to initiatives that deal with climate change, but in a reversal today, he announced that he accepted a new version of the bill, now called “Inflation Reduction Act of 2022.”

We pulled the information from the bill and confirmed all the changes to the EV federal tax credit in the new version:

  • Federal tax credit for EVs maintained at $7,500
    • Eliminates tax credit cap after automakers hit 200,000 EVs sold, making GM and Tesla once again eligible
    • The language in the bill indicates that the tax credit would be implemented at the point of sale instead of on taxes.
    • In order to get the full credit, the electric vehicle needs to be assembled in North America, the majority of battery components need to come from North America, and contain a certain percentage of minerals from countries with free trade agreements with the US.
  • A new federal tax credit of $4,000 for used EVs
  • Zero-emission vans, SUVs, and trucks with MSRPs up to $80,000 qualify.
  • Electric sedans priced up to $55,000 MSRP qualify.
  • The full EV tax credit will be available to individuals reporting adjusted gross incomes of $150,000 or less, $300,000 for joint filers.

This would enable Tesla and GM to get access back to the credit – though in Tesla’s case, it would only apply to some versions of the Model 3 due to the new $55,000 price limit.

The new limit on gross income has also been greatly reduced.

However, the bill is not law yet, but with Manchin now being on board, it should be able to move through the legislative process after over a year of negotiation.

Update: here’s a more detailed look at what is in the bill written by an actual lawyer, Chris Stidham:

New Vehicle Credit

  1. Manufacturer caps eliminated. (Page 370, line 15)
  2. Credit applies for vehicles purchased beginning January 1, 2023. (Page 386, line 1).
  3. Transition provision for EVs with written sales orders dated in 2022 prior to the date of President signing the bill but delivered in 2023 allows purchaser to claim the “old” credit in 2023. (Page 386, line 20).
  4. Vehicle must be assembled in North America to qualify for new credit. (Page 366, line 15).
  5. North American assembly requirement applies to vehicles sold after the date of adoption of the bill. (Page 386, line 3)
  6. $7,500 credit is broke into two binary pieces meaning the vehicle either qualifies for each piece of the credit or it doesn’t. No longer based on size of battery. (Page 366, line 6)
  7. $3,750 of the new credit is based upon the vehicle having at least 40% of its battery critical minerals from the United States or countries with a free trade agreement with the United States. This is a list of countries with free trade agreements with the US.(Page 371)
  8. The other $3,750 of the new credit is based on at least 50% of the battery components of the vehicle coming from the United States or countries with a free trade agreement with the US. (Page 372, line 13)
  9. The 40% minerals requirement increases to 50% in 2024, 60% in 2025, 70% in 2026 and 80% in 2027. (page 371 line 23)
  10. The 50% battery components requirement increases to 60% in 2024, 70% in 2026, 80% in 2027, 90% in 2028 and 100% in 2029. (Page line 373)
  11. The government has until the end of the year to develop guidance on the battery requirements. (Page 374)
  12. Beginning in 2025, any vehicle with battery minerals or components from a foreign entity of concern are excluded from the tax credit. (Page 374, line 20).
  13. One credit per vehicle. (Page 375, line 12)
  14. Modified gross income limit of $150k for individuals, $225k for head of household, and $300k for joint returns. Definition of MAGI (page 375, line 22)
  15. MSRP of vehicle must be $80k or less for SUVs, Vans and Trucks. $55k for all other vehicles. (Page 377, line 4)
  16. Dealer can apply credit at time of sale. Dealer must disclose to buyer the MSRP of the vehicle, the applicable tax credit amount and the amount of any other available incentive applicable to the purchase. (Page 378, line 6)
  17. Credit terminates December 31, 2032.

Used Vehicle Credit

  1. Tax credit of 30% of value of used EV with $4,000 cap (Page 387, line 23).
  2. Used vehicle must be at least two model years old at time of sale. (Page 389, line 7).
  3. The original use of the vehicle must have occurred with an individual other than the one claiming the used tax credit. (Page 389, line 10).
  4. Used vehicle must be purchased from a dealer. (Page 390, line 3).
  5. Used vehicle price must be $25k or less. (Page 390, line 5).
  6. Used vehicle qualifies for tax credit only once in its lifetime. (Page 390, line 7)
  7. Purchaser must be an individual (no businesses) to qualify for used credit. (Page 390, line 14).
  8. Purchaser may only claim one used vehicle credit per three years. (Page 390, line 20).
  9. Modified gross income cap of $75k for individuals, $112,500 for head of household and $150k for joint returns. (Page 388).
  10. Credit may be applied at time of sale by dealer. (Page 391, line 15).
  11. Credit terminates on December 31, 2032. (Page 391, line 12).

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