While the so-called Inflation Reduction Act includes a $7,500 tax credit for Americans who purchase electric vehicles (EVs) and plug-in hybrid vehicles, a variety of strings attached to the credit assure that it would have minimal impact on the current U.S. automotive marketplace.
Previous EV subsidies often primarily benefited wealthy car buyers, an outcome the National Taxpayers Union has criticized. The Inflation Reduction Act addresses this concern by limiting the availability of subsidies based on both the income of car buyers and the price of vehicles.
To qualify for the full credit, a vehicle could be assembled in Canada or Mexico, but not in Germany, Japan, Korea, or another country. In 2021, these three countries supplied more than half of U.S. plug-in vehicle imports.
The bill also includes restrictions on batteries, which account for 30 to 40 percent of the value of electric vehicles. Manufacturers would have to use batteries consisting of a minimum level of North American content, starting at 50 percent and escalating to 100 percent in 2029. Forty percent of the critical minerals used for batteries would have to be extracted or processed in countries the United States has a free trade agreement with, escalating to 80 percent in 2027. Alternatively, vehicles may use a battery that has been recycled in North America.
This provision would cap the use of critical minerals from the entire continent of Africa. Additionally, if any battery components are produced in China or another “foreign entity of concern” (as of 2024), or if any critical minerals in the battery originate from China or another foreign entity of concern (as of 2025), the vehicle would not be eligible for the credit.
It is reasonable to try to keep subsidies from benefiting countries like China. But ironically, the Chinese Communist Party has also attempted to restrict exports of critical minerals needed by U.S. clean vehicle manufacturers. For example, according to a 2014 report from the Office of the U.S. Trade Representative, “Rare earths, tungsten, and molybdenum are key inputs in a multitude of U.S-made products for critical American manufacturing sectors, including hybrid car batteries, wind turbines, energy-efficient lighting, steel, advanced electronics, automobiles, petroleum and chemicals…. China’s decision to promote its own industry and discriminate against U.S. companies has caused U.S. manufacturers to pay as much as three times more than what their Chinese competitors pay for the exact same rare earths.”
Taken together, these requirements mean very few clean vehicles would be eligible for the credit. As reported by E&E News: “The EV supply chain required for the tax credit doesn’t exist.” Indeed, the Congressional Budget Office estimates this subsidy would cost about $7.541 billion over the next 10 years, equivalent to purchases of about 100,500 vehicles a year on average. That’s not much compared to the 608,000 EVs and plug-in hybrid electric vehicles purchased by Americans in 2021.
The bottom line is that the proposed clean vehicle subsidies included in the Inflation Reduction Act would be unlikely to have any significant impact on the U.S. motor vehicle marketplace. Congress is prioritizing protectionism over clean vehicles.
Bryan Riley is Director of NTU’s Free Trade Initiative.