The Inflation Reduction Act Will Soon Make it Cheaper to Buy EVs—If They Have North American Batteries

The push to incentivize electric vehicle ownership just got a little harder. Most electric vehicles no longer qualify for the full $7,500 federal tax credit that helped millions of buyers lower the cost of switching from gas-powered vehicles to electric over the last decade.

Changes to the tax credit language took effect Tuesday afternoon when President Joe Biden signed into law the Inflation Reduction Act, which includes a number of federal provisions aimed at keeping EVs affordable and limiting China’s influence on the supply chain. Under the new law, in order to qualify for tax credits, buyers must have an income below a certain threshold, the vehicle they select must not exceed a certain price point, and the vehicle’s battery must be made in North America. Auto analysts say these requirements will likely block some buyers from receiving tax credits, particularly those who are more wealthy, but the new legislation is expected to incentivize lower-income households to purchase EVs in the near future.

“It’s going to change the calculus for total cost of ownership,” says Kevin Roberts, director of industry insights and analytics at CarGurus. “If you are looking for that $7,500 tax credit, this law could change what type of vehicle you’re looking to purchase.”

What the legislation says about EV tax credits

The most significant provision is that electric vehicles must contain a battery built in North America with minerals mined or recycled on the continent in order to qualify for the tax credit. The legislation stipulates that by 2024, at least 50% of EV batteries must come from the U.S., Canada, or Mexico, with that figure rising to 100% by 2028. That could be a challenge for some automakers since the vast majority of minerals, components, and battery cells are currently sourced from China.

When lawmakers drafted the climate and energy package, one of the main focuses was to freeze China out of the supply chain. The legislation aims to stimulate U.S. production of raw materials like iron and phosphate as opposed to relying on batteries that contain high levels of nickel and cobalt that are imported from China.

Additionally, under the new law, electric vehicle buyers cannot receive the credit if they have taxable income above $150,000, or $300,000 for joint filers. The legislation also includes vehicle price restrictions to qualify for the credit, penalizing more expensive EV makers like Lucid and Rivian, with a cap of $55,000 for sedans, hatchbacks, and wagons, and $80,000 for trucks, SUVs, and vans.

Read more: What Experts Say About How Valuable The Inflation Reduction Act’s Green Subsidies Will Be

These price-related restrictions could encourage some automakers to lower the sticker price of their EVs below $55,000 or $80,000 once supply chain disruptions ease up and more vehicles are on dealership lots, Roberts says. But that all depends on how expensive the raw materials and new factories needed for batteries manufactured in North America are for automakers.

Currently, the average price of an EV is around $66,000, according to Kelley Blue Book, though some models cost half that value. A new Nissan Leaf, for example, starts at $27,800.

Which cars qualify for EV tax credits?

Given the new restrictions, the vast majority of electric vehicles won’t qualify for the full $7,500 tax credit. Only around 15 EV models currently sold in the U.S. are expected to meet the price requirements, and the companies that manufacture them still have a number of political and financial hurdles to jump in order to build a domestic supply chain that complies with the made-in-North America battery sourcing requirements—meaning it could be a few years until these models are compliant.

A list from Consumer Report includes nearly a dozen vehicles that would meet the new credit requirements if their batteries are primarily sourced in North America as outlined by the legislation: Cadillac Lyriq, Chevrolet Blazer EV, Chevrolet Bolt, Chevrolet Bolt EUV, Chevrolet Silverado EV, Ford F-150 Lightning, Ford Mustang Mach-E, Nissan Leaf, Rivian R1S, Rivian R1T, Tesla Cybertruck, Tesla Model 3, Tesla Model Y, and Volkswagen ID.4.

Buyers should note, however, that they may have to select models with less premium trims in order to stay under the respective price caps depending on the type of vehicle. A Rivian R1S starts at $72,500, for example, but with upgrades such as advanced speakers or perforated seats could cost much more than $80,000.

According to John Bozzella, CEO of the Alliance of Automotive Innovation, it may take years for EVs to meet the battery requirements since the kind of infrastructure needed to manufacture North American batteries at a scale similar to China doesn’t currently exist. “The $7500 credit might exist on paper, but no vehicles will qualify for this purchase incentive over the next few years,” he said in a statement. “That’s going to be a major setback to our collective target of 40-50 percent electric vehicle sales by 2030.”

How much money you can save on EVs?

Buyers who meet the income requirements and select an electric vehicle that satisfies the battery and price restrictions are eligible to receive up to $7,500 from the government in the form of a tax credit. The program began in 2010 as a way to bring the cost of clean energy vehicles down, and is available for both pure electric vehicles and plug-in hybrids.

However, the amount of credits that a vehicle qualifies for depends on the size of its battery. The base incentive is $2,500 and increases another $417 for every 5 kWh of battery up to $7,500 in total. A base level Chevrolet Bolt EV starting at $31,500, which has a 65 kWH battery, would cost $24,000 after the tax credit.

The amount of tax credits a person will receive also depends on how much taxes they owe; if the car someone purchase is eligible for up to $7,500 in tax credits, they must owe that amount or more to receive the full credit

The new legislation also targets used electric vehicles, which for the first time qualify for a credit of up to $4,000 if the pre-owned vehicle costs $25,000 or less and is more than two years old. Used vehicles do not have to comply with the made-in-America requirements. “That could be a game changer down the road,” Roberts says, even though buying an electric vehicle for under $25,000 is “almost impossible right now” due to high demand. The average price of a used car is $30,863, but that figure jumps to $67,134 for used Teslas, according to data from CarGurus. Over the next 10 years with the legislation in place, auto analysts predict used EVs will drop to the $25,000 price point.