In 2024, qualifying for federal tax credits for electric vehicles (EVs) will become more challenging due to new rules implemented by the Biden administration. These changes aim to encourage automakers to prioritise manufacturing in North America while reducing dependence on China. However, as a result, fewer EV models, including popular ones like the Tesla Model 3 and Ford Mustang Mach-E, will be eligible for tax savings.
Impact of New Rules on Electric Vehicle Tax Credits:
Efforts to combat global warming may face setbacks as the number of EVs qualifying for federal tax credits is reduced. Previously, these credits, amounting up to $7,500 per vehicle, helped make EVs more affordable, allowing some models to be priced below $30,000. Starting next year, dealers will have the authority to apply the credit directly to the purchase price, eliminating the need for buyers to claim it on their tax returns. However, the need to meet stricter sourcing requirements may hinder eligibility for the credit.
The Inflation Reduction Act has introduced stricter rules for EVs, aiming to incentivize automakers to manufacture vehicles and parts in North America. These regulations require car manufacturers to source batteries and essential materials such as refined lithium from the United States or trade allies. Automakers like Tesla, General Motors, Ford, Volkswagen, Rivian, and Nissan are currently the only companies offering electric cars that qualify for partial or full tax credits. Some plug-in hybrid vehicles from Audi, BMW, Chrysler, Jeep, and Lincoln also qualify for tax breaks.
China Restrictions and Confusion:
Starting from January 1, 2024, vehicles containing components made in China or produced by Chinese government-controlled firms will be disqualified from tax credits. This adds another layer of complexity, causing confusion among consumers and industry executives. The implementation of these new rules may lead to a limited number of EVs qualifying for tax credits, negatively impacting the industry.
Potential Growth and Future Eligibility:
Despite the challenges, the sales of EVs continue to rise, with projections indicating a 32% increase in sales in 2024. Major automakers like Volkswagen, Stellantis, and Kia have plans to ramp up production in the United States, aiming to meet the sourcing requirements and gain eligibility for tax credits. Kia plans to produce the EV9, a seven-passenger electric SUV, in Georgia. Stellantis, which owns Chrysler, Dodge, Ram, and Jeep, intends to introduce six mass-market electric vehicles in 2024. Additionally, certain hybrids meeting sourcing requirements could also qualify for tax credits.
Market Trends and Lower Prices:
Market forces and increased production of EVs are driving down prices. Analysts predict that electric vehicles will eventually become more affordable than internal combustion models without the need for tax credits. In November, the average list price of an electric vehicle dropped to $63,000, down from $68,000 the previous year. Federal subsidies and loans for battery factories and EV plants also contribute to price reductions, making EVs more accessible to mainstream consumers.
The forthcoming changes in 2024 Federal Tax Credits for electric vehicles pose challenges for both the industry and consumers. The stricter sourcing requirements and restrictions on Chinese components may limit the number of EVs eligible for tax credits. However, as automakers adapt to these new regulations, the market is expected to continue growing, bringing forth more affordable and mainstream electric vehicles.