The so-called Inflation Reduction Act (IRA) signed into law by President Biden included new tax credits for electric vehicles (EVs). EVs are already extremely popular with consumers and there is little reason to subsidize their purchase with tax credits. However, the structure of the credits reveals additional cause for concern. Since the credits are limited to vehicles assembled in North America, U.S. allies in Europe and the Pacific Rim strongly objected. The content and assembly restrictions included in the Act discourage the adoption of EVs, violate U.S. trade commitments, and interfere with the transition of battery sourcing to countries other than China.
The Biden administration responded to our allies’ objections to the IRA with mixed signals. President Biden said: “I make no apologies, since I wrote it,” but he also proposed unspecified “tweaks” to the law. Commerce Secretary Gina Raimondo disagreed with President Biden about the source of the problem, instead blaming Congress. Treasury Secretary Janet Yellen further walked back the possibility of significant tweaks: “The legislation is what it is. We have to implement the law that was written.”
Regardless of who’s to blame, there is a limited amount the Biden administration can do to tweak the law’s protectionist EV subsidy provisions short of asking Congress to enact new legislation. For starters, the IRS should issue clear and prompt guidance clarifying how it will implement the EV subsidies. The IRS guidance issued December 12 is incomplete. For example, there is no clarification on whether Japan will be counted as a country with which we have a free trade agreement – U.S. Customs and Border Protection says we do – and there is no guidance on the IRA’s critical mineral and battery requirements. Perhaps the best action the Biden administration can take to facilitate the use of EVs is entirely unrelated to the Inflation Reduction Act. That’s to waive or rescind costly Buy American requirements that stand in the way of constructing affordable EV charging stations. Such a waiver would benefit all American EV buyers.
Background
Starting January 1, a new EV will be eligible for a tax credit of $3,750 if 50 percent of its battery’s components were manufactured or assembled in North America. This requirement ramps up to 100 percent starting in 2029.
An EV will be eligible for an additional $3,750 if 40 percent of the critical minerals used in its battery were extracted or processed in the United States or a country with which we have a free trade agreement, or recycled in North America. This increases to 80 percent in 2027. Bizarrely, the Biden administration is providing taxpayer-subsidized funds for mining, mineral processing and recycling projects around the world, but batteries produced with those U.S.-subsidized batteries will not be eligible for the EV-battery credit.
Additionally, none of the battery components or critical minerals may be sourced from a “foreign entity of concern” such as China, and final assembly of the vehicle must occur in North America.
The battery and critical mineral provisions are designed to incentivize sourcing in countries other than China. That won’t happen overnight.
According to John Bozzella, president and CEO of the Alliance for Automotive Innovation, “The $7,500 credit might exist on paper, but no vehicles will qualify for this purchase incentive over the next few years.” John Connelly, chairman of the American International Automobile Dealers Association, called the EV credit “a dud.” If policymakers want the tax credits to actually be available to consumers, one suggested legislative tweak would be to phase in the IRA’s provisions over a longer timeframe.
However, while the restrictions on batteries and components may render the EV credits useless in the short term, it’s understandable that Congress doesn’t want to see federal subsidies wind up in the pockets of suppliers based in China. Batteries account for 30 to 40 percent of the value of EVs, and China is the biggest supplier of EV batteries. In recent years as the U.S. government was criticizing Chinese industrial subsidies, it was simultaneously funneling subsidy dollars to China every time a qualifying EV was sold in the United States.
Ending that practice may be reasonable, but starting a trade war with the very allies we should be working with to address our common concerns related to Chinese policies is not. The United States, once a leader in the move toward international free trade, now finds itself subject to widespread criticism.
- The European Commission wrote: “The Act risks causing not only economic damage to both the US and its closest trading partners, resulting in inefficiencies and market distortions, but could also trigger a harmful global subsidy race to the bottom on key technologies and inputs for the green transition.”
- A senior Korean official reportedly called the subsidies “a betrayal.” A former security secretary compared it to “being stabbed in the back.”
- Japan’s government asserted: “The requirements of the EV tax credit…are not consistent with the US and Japanese governments’ shared policy to work with allies and like-minded partners to build resilient supply chains.”
What the Biden Administration Can Do
While the fundamental merits of the IRA’s tax provisions are highly questionable, if the intent behind them is to encourage the utilization of EVs, Congress should remove the protectionist sourcing restrictions that affect our allies and violate U.S. trade commitments. The European Union (EU) wants to see the EV law fixed by the end of the year. That’s probably wishful thinking. But what the Biden administration can do is allow taxpayer dollars intended to build up the U.S. charging infrastructure to be used in the most cost-effective way, thereby boosting the use of EVs without regard to where they are assembled. Notably, car buyers are concerned not just about the cost of EVs, but their range and the ability to charge them.
Buy America requirements currently stand in the way of expanding the country’s EV charging infrastructure. For example, requiring steel used in chargers to be produced in the United States reportedly increases unit costs by more than 25 percent. According to recent testimony from the CEO of EVgo, which operates one of the largest fast-charging networks for EVs in the United States, U.S.-made fast chargers are not widely available at this time. The American Association of State Highway and Transportation Officials told the Federal Highway Administration that “...a much more gradual approach to the implementation of the new Buy America requirements is needed to minimize disruptions to EV charger deployment and to ensure that current supply issues are not intensified.”
An even better approach would be for the Biden administration to permanently waive Buy America requirements that increase the cost of federal infrastructure projects.
Environmentalists and taxpayer advocates may disagree about the scale of government spending or the scope of EV subsidies. For example, National Taxpayers Union does not believe EV credits are necessary, but has supported means testing so that taxpayers do not subsidize wealthy car buyers. Something both should agree on is the need to get the most bang for our buck from infrastructure spending. The Biden administration should update its Buy America executive order to specify that domestic purchasing requirements may not be used in a way that impedes the transition to clean energy, including solar, wind, and EVs. If the administration actually wants the EV tax credits to achieve their intended goal, it should also work with Congress to improve them. Removing policies that discriminate against our allies should be at the top of the list. Instead, we should pursue opportunities to work together toward our common goals.