Senators Question EV Tax Credit Guidance at Hearing

Allowing the financing companies that own leased vehicles to claim tax credits irrespective of where electric vehicles and their batteries were made, and lengthening the timeline to cut China out of battery and critical mineral supply chains, runs contrary to the Inflation Reduction Act, argued Senate Energy and Natural Resources Committee Chairman Joe Manchin, and the ranking member of the committee, Sen. John Barrasso, R-Wyo.

The committee asked top Treasury and Department of Energy officials why they wrote guidance for manufacturers that's different from the law's text during a hearing Jan. 11.

Deputy Treasury Secretary Wally Adeyemo and Deputy Energy Secretary David Turk did not directly answer those questions, but defended the work to build up domestic critical mineral processing and battery manufacturing, and shared figures of how rapidly those industries are growing, with the support of manufacturing tax credits, grants and loans offered by the federal government.

Adeyemo, who testified remotely because he is COVID-positive, emphasized that the definitions of where mineral processing begins and battery component manufacturing begins, as well as other details needed to comply with the regional value content rules are up for revision as Treasury considers stakeholder input -- including from Manchin.

Manchin, D-W.Va., said in his opening statement: "My problem is not with EVs. My problem is this Administration’s crusade to convert everyone over to an EV regardless of where the battery came from or what the law actually says.

“First, in proposed guidance, the administration has cut the IRA critical mineral sourcing percentage requirements in half -- which is a blatant violation of the numbers that Congress wrote directly into the law.

"They are also pretending battery component manufacturing is the same as critical minerals processing. Extraction and processing are different than manufacturing, and it’s stated in the bill that manufacturing has to be done in North America to get the $3,750. They are proposing fake 'critical minerals free trade agreements.' Indonesia is controlled by China. You can’t think that Indonesia is going to be a free trade agreement country. They don't have control of it. These are the things we are talking about. And, most recently with proposed rules on Foreign Entities of Concern, the administration is delaying deadlines we wrote into the IRA to remove China completely from our battery supply chains."

He displayed a chart that indicated the guidance gives battery makers two and three more years to cut China out of their supply chains and have the cars containing those batteries still qualify for $3,750 of the consumer EV tax credit. However, those additional years are only for low-value inputs that stakeholders told the government are not yet traceable, not for all the minerals or battery components.

"The tax code Congress writes isn't a set of voluntary guidelines," he said, and said that if the administration doesn't correct course, he thinks a company that is trying to set up domestic critical mineral processing will sue, because they will be competing for market share with Chinese-processed critical minerals. If there is a lawsuit, Manchin vowed, "I will support any entity that goes to court to correct the illegal liberalization of this law with an amicus brief."

Barrasso, who opposes using taxpayer funds to accelerate the move from gasoline-powered cars to EVs, argued that the IRA "plays right into the hands of the Chinese."

He said leased vehicles built in China can qualify for the tax credit, and that loophole is alarming.

Manchin replied, "I agree with you 1000%, and that's what we're trying to solve."

Adeyemo responded that the value content standards for the tax credit -- including the new foreign entity of concern restrictions -- are tough, as evidenced by the fact that there were more than 40 cars assembled in North America that qualified for a tax credit in 2023, but only 13 will qualify in 2024.

But, he said, Treasury hears from automakers that the rules are "achievable standards."

He said the way the IRA is being implemented will mean both the cars and the batteries will be built here.

Turk said in his opening statement that $157 billion in domestic investment for EVs and batteries has been announced since the IRA passed.

He acknowledged that the EV supply chain is dangerously reliant on Chinese inputs, particularly because China is dominant in the processing of critical minerals, which he characterized as the midstream part of the process.

Adeyemo said in his opening statement that Chinese refiners produce 77% of cobalt, more than half of refined lithium, and that 84% of anode battery components, 68% of cathode components and 77% of advanced battery cells are built in China.

Turk said that China's "non-market policies and practices have resulted in market distortions that have made it very difficult for midstream processing capabilities to be built in the U.S. or other countries," he said, and noted that it is trying to preserve that dominance by banning the export of technology from its firms that extract and separate critical minerals.

But Turk said the U.S. is working with Canada, Japan, the UK, the EU and Australia to create resilient critical mineral supply chains." As part of this process, it is important to build capabilities for tracing and verifying the mineral origin for advanced batteries, magnets, and other manufactured products," he testified.

Sen. Josh Hawley, R-Mo., who complained that the administration has a "climate fixation," said that anti-pollution rules that require that two-thirds of new vehicle sales by 2032 be EVs are a strategic blunder.

"Your policies are driving us and our supply chains into the hands of our greatest geostrategic enemy," he argued.

Turk responded that the country is making tremendous progress on ramping up processing graphite, lithium and other materials in the EV supply chain. The U.S. had already mined the minerals but sent them to China for processing. Turk told Manchin during the hearing that 16% of the graphite in EVs by 2027 will be American -- currently all the graphite is processed in China.

"We want U.S. workers to benefit from this revolution," he said.

Hawley responded if that's true, "why is it that you're reinterpreting the tax credits to allow the tax dollars to flow to Chinese entities? Why would we want to pay them to take them from us!"

Turk said, "We are arguing we are not doing that. The fact that only 13 models qualify at this point is a good data point that we take this very seriously, and we want to have these jobs in the U.S."

Hawley said the foreign entity of concern guidance is looser than the text of the law, allowing batteries with Chinese content to continue to qualify, and in Hawley's view, benefit from the taxpayer subsidy.

Turk replied, "I would strongly disagree with that."

Sen. John Hickenlooper, D-Colo., and Sen. Catherine Cortez-Masto, D-Nev., each expressed their disappointment that production tax credits aren't available in the minerals processing industry, only for battery component production.

Adeyemo told Hickenlooper: "You're right, we ultimately want to create incentives not just for the manufacturing but also the mining." But, he said, Treasury doesn't allow the cost of acquiring materials to be included in the calculations for the 45X tax credit, because it wants to make sure that credit is underwriting economic activity in the U.S., not the cost of imported materials. However, he told them Treasury is taking stakeholder comments into account as it shapes the final rule.