Electric Vehicle Tax Credit Rules Create ‘Chaos for Consumers’

Electric Vehicle Tax Credit Rules Create ‘Chaos for Consumers’

Designed to accelerate the shift to electric cars among other climate goals, the Inflation Reduction Act has in practice made buying such vehicles a lot more complicated.

In August, the law ruled out the full tax credit of $7,500 for electric vehicles and plug-in hybrids assembled outside North America. That may make it harder 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 that a certain percentage of the components and minerals in car batteries are sourced from the United States or in countries that are its trade allies — numbers that will increase over time.

Just 11 electric cars from four automakers — Tesla, General Motors, Ford Motor and Volkswagen — now qualify for the full tax credit; several others can qualify for a partial $3,750 credit. The list is expected to grow as more automakers reconfigure their supply chains.

The rules are already driving big changes in the buying and selling of electric cars. Some automakers whose models are no longer eligible are now pushing leased electric cars. That’s because the law allows leased vehicles to qualify as commercial vehicles, which the Inflation Reduction Act exempts from the restrictions that apply to cars bought 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 cost $58,940 on average in March, nearly $11,000 more than a typical new car, according to Kelley Blue Book.

Ethan Derner of Portland, Ore., and his fiancée, Lorien Sekora, share two Kia electric cars. Mr. Derner had considered replacing his car with a new model that could drive farther on a charge, but he gave up after realizing that the vehicles he wanted were either too expensive or no more practical than his current car. He has extended the lease on his Kia Soul and is waiting for more affordable models that can qualify for a tax credit.

“The only other model I’m considering now is a Rivian, but that’s out of my price range,” Mr. Derner said. Rivian’s electric luxury models like the R1T pickup truck and R1S S.U.V. lost their eligibility for a tax credit because of battery sourcing requirements despite being built in Illinois.

“Until I can drive to Seattle and back with no anxiety,” Mr. Derner added, “I’m not going to buy a new E.V. outright.”

His experience is common. About 80 percent of people who were shopping for an electric vehicle recently surveyed by Cars.com said tax credits played a big role in their decision to buy an electric car and the vehicle they planned to buy.

Many industry experts and consumers have praised the multipronged mission of the law to curb greenhouse gas emissions, create jobs in the United States and blunt 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 U.S. auto industry.

Yet the rules could hinder the goal of getting more people to buy electric vehicles — at least for the next few years.

“They made it complex 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’s absolutely going to hurt the companies that aren’t eligible and help the companies that are.”

The reshuffled credits appear to deal an especially tough hand to Hyundai Motor, which also owns the Kia and Genesis brands.

Models like the Hyundai Ioniq 5 and Kia EV6 have won industry accolades and impressed buyers with attractive designs and some of the fastest charging times of any electric cars. But they are built in South Korea and, thus, not eligible for any federal tax breaks.

Even as sales of all Hyundai and Kia cars jumped in the first three months of the year, the brands’ electric vehicle sales fell more than 25 percent, according to Kelley Blue Book. Electric car sales on the whole soared to another record in the first quarter, on a pace to top one million cars in 2023, and now account for 7.2 percent of all new cars sold.

The credit rules have been changing fast. Last month, Genesis’ first American-built model, the Electrified GV70 sport utility vehicle, began rolling off a Hyundai line in Alabama after 16 hours of assembly. Genesis executives had hoped that the model could qualify for a credit, but the car did not meet the tougher rules the Biden administration released this week.

To make up for the loss of the tax breaks, Hyundai and other automakers are trying to lure buyers through leases. Under the administration’s broad interpretations of the law, leased electric cars are eligible for tax credits even if they are made overseas and are not subjected to the government’s rules on sourcing requirements for battery components and minerals, household income caps and vehicle price thresholds.

Car dealers can pass along the commercial credit to consumers by lowering the price of the car in lease transactions, which could reduce monthly payments. Under the rules of thumb for auto financing, applying the full $7,500 credit to a lease could save consumers about $225 per month over three years, or $125 per month over five years, said Russell Datz, a spokesman for Volvo.

Volvo, which is based in Goteborg, Sweden, sells two electric models in the United States that are made at a factory in Belgium and do not qualify for federal tax credits. The automaker will start assembling a new S.U.V., the EX90, at its factory in South Carolina this year.

Consumers are getting the money-saving message. In September, after the law’s passage, just 7 percent of consumers leased an electric vehicle, according to Edmunds.com. By March, leases accounted for 34 percent of the electric car market.

Gary Murphy, a retired educator in Castle Rock, Colo., leased an Ioniq 5 in February from a dealer that learned of the commercial credit the day before.

“We had no plans to lease a car,” Mr. Murphy said. “But when they confirmed you can get $7,500 on a lease, or nothing to buy, that’s too big an incentive to pass up.”

Before tracking down the Ioniq 5, he waited for months for three different electric models, which were in short supply. When cars were available, many dealers demanded several thousand dollars more than manufacturers’ suggested retail prices.

“You can get the credit, but you can’t get the car,” Mr. Murphy said.

The use of credits for leased vehicles has angered some automakers and lawmakers who say it subverts the intent of Congress. Consumers can lease any electric vehicle for the $7,500 credit. For example, a couple making more than $300,000 — the income limit for married people for the tax credit — can lease a $148,000 Mercedes-Benz AMG EQS and claim a $7,500 credit even though the car is made in Germany and far exceeds the $55,000 price cap for electric sedans to qualify for the credit.

Treasury officials have said their decision to allow a tax credit for leased cars is legally sound. The Inflation Reduction Act exempted commercial vehicles from the restrictions to encourage rental car companies, local governments and other owners of car and truck fleets to buy electric vehicles.

Of course, many consumers prefer buying and owning cars, in part to avoid lease limits on how much they can drive and penalties for excessive wear and tear.

José Muñoz, the chief executive of Hyundai and Genesis Motor North America, insists the loss of buyer credits puts his brands at a huge marketplace disadvantage. But the chairman of Hyundai’s national dealer council, 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 longest-range and most energy-efficient mass-market electric car in the United States. It can be driven up to 361 miles on a full charge and gets the equivalent of 140 miles to the gallon, according to the Environmental Protection Agency.

“I think our customers will evaluate the full landscape, not just whether an E.V. qualifies for credit,” said Mr. Reilly, the owner and president of Alexandria Hyundai in Virginia.

Mr. Reilly said leasing offered other advantages. People who are anxious about switching to battery-powered cars can try one without a long-term commitment or worrying about resale value. And as electric vehicle technology advances and more affordable models hit the market, customers can easily upgrade when their lease is up.

Still, some car buyers said they would buy only electric cars eligible for tax credits because they supported the aims of the Inflation Reduction Act.

Jonathan Quarles, an entrepreneur in Detroit, said he spent more than $150 per week to fill up a Ford Expedition to ferry his three daughters around town. He is considering replacing it with an electric Ford Mustang Mach-E, which is eligible for a $3,750 federal tax credit. After watching manufacturing jobs leave the country for decades, he said, he has little sympathy for automakers whose cars did not qualify for credits.

“My perspective is,” he said, “you should have been building those factories way before the credit.”