Climate Legislation No Longer Favors US Car Assembly

A controversial electric vehicle purchase tax credit (see 2203010064) that was limited to cars and trucks assembled in U.S. plants by union workers has been changed to a tax credit that says the vehicle has to have final assembly in North America. Purchases of new clean vehicles (they can include fuel cells, not just EVs) are eligible for a $7,500 tax credit for buyers whose joint income is below $300,000 or an individual taxpayer with a modified adjusted gross income of $150,000 or less.

The credit is part of a major climate, tax and health bill that was once called Build Back Better. A slimmed down version is now called the Inflation Reduction Act, and was announced the evening of July 27.

Part of the credit is based on how much of the critical minerals in the EV battery were either extracted or processed in countries that are in free trade agreements with the U.S. (or recycled in North America) and the value of the battery components that are in either a plug-in hybrid or an EV must be 50% North American for vehicles that come into service through 2023, then 60% in 2024 and 2025, 70% in 2026, 80% in 2027, 90% in 2028, and wholly North American starting in 2029. The completely North American standard is stricter than the USMCA auto rules of origin, which would require EV batteries to be 75% North American by 2025.

Canada and Mexico had lobbied fiercely against the previous EV tax credit. Canadian Minister of Industry François-Philippe Champagne tweeted in French, "We have worked tirelessly to position Canada as a leader in the EV market. The proposed agreement in the Senate is a vote of confidence for our workers and our ecosystem. Canada is part of the solution when it comes to building a strong & resilient economy."

Canada's trade minister, Mary Ng, issued a statement that said in part, "We are encouraged by the recognition of the unique North American trading relationship and the tightly-integrated Canadian-U.S. supply chains."

The Mexican Embassy's press office did not return a request for comment by press time.

USMCA auto rules of origin expert Dan Ujczo told International Trade Today in an e-mail July 28: "While the Inflation Reduction Act of 2022 largely aligns with the vision of the future North American auto industry negotiated in the USMCA, the critical minerals thresholds are potentially stricter than the USMCA’s auto rules of origin. The USMCA included strict provisions requiring the production of EV cells to be 'Made in North America.' There was some flexibility in the rules to allow the sourcing of the raw materials/critical minerals from third countries. The proposed text of the new Act seems to preclude that should the producers and purchasers want to claim the credits. The trillion dollar question is whether North America can produce the critical minerals fast enough. Current projects in Idaho, Quebec and Canada’s 'Ring of Fire' need to come on-line in a hurry to make this vision a reality."

The tax credits will be available from the dealer, so that buyers will not have to wait to get the refunds at tax time, but will be both income-limited and restricted to passenger cars with a list price of $55,000 or lower and light trucks, vans and SUVs with list prices of $80,000 and below.

Commercial clean vehicles also will be eligible for tax benefits in some circumstances.

Autos Drive America, which represents automakers with plants in the U.S. outside Detroit's Big Three, also had lobbied against the earlier language, becuase their plants are not unionized. CEO Jennifer Safavian said in a statement,“International automakers are leading the transition to electrification -- setting ambitious environmental goals and accounting for 66% of all new green vehicle sales in the U.S. They continue to make investments across the country to boost production of electric vehicles and to make them accessible to more Americans.

“While we work to understand the full impact the Clean Vehicle Credit contained within the Inflation Reduction Act of 2022 would have on the automotive industry and consumers, we encourage Congress to steer clear of any policy that would constrain electric vehicle production, hinder consumer adoption, and make it more difficult to achieve our shared climate goals.”

The Senate is aiming to pass the bill with all 50 Democratic senators' votes, and a tie-breaking vote from the vice president, under special rules that allow straight majority votes for bills that lower the deficit. The bill also raises taxes, and $300 billion of that revenue is dedicated to lowering the federal deficit. Lowering the deficit and raising taxes is considered to be inflation-fighting.