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March 29, 2024

Designed to accelerate the shift to electric vehicles, among other climate goals, the Lower Inflation Act actually makes buying such vehicles more complicated.

In August, the law excluded the full $7,500 tax credit for electric and plug-in hybrid vehicles assembled outside of North America. That could make it harder for consumers to make the financial or psychological leap to buy an EV.

The Treasury Department tightened those rules further this week, requiring a certain percentage of components and minerals in car batteries to come from the U.S. or its trading allies — a figure set to increase over time.

There are now 11 EVs from just four automakers (Tesla, General Motors, Ford, and Volkswagen) Eligible for a full tax credit; several others are eligible for a portion of the $3,750 credit. The list is expected to grow as more automakers reconfigure their supply chains.

These regulations are already driving major changes in the buying and selling of electric vehicles. Some automakers whose models are no longer eligible are now promoting leased electric vehicles. That’s because the law allows leased vehicles to qualify as commercial vehicles, and the Reduction of Inflation Act exempts restrictions that apply to individual car purchases.

For many car buyers, the availability of tax credits is critical. EV prices have fallen in recent months, but the average price in March was still $58,940, nearly $11,000 more than the average new car, according to the Kelley Blue Book.

Ethan Derner of Portland, Ore., and his fiancée Lorien Sekora share two electric Kia vehicles. Mr. Derna considered replacing his car with a newer model that could go farther on a charge, but backed away after realizing the vehicle he wanted was either too expensive or no more practical than his current car. He has extended his lease on the Kia Soul and is waiting for a more affordable model that can qualify for tax credits.

“The only other model I’m considering right now is the Rivian, but that’s out of my price range,” Mr. Derner said. Rivian’s electric luxury models, such as the R1T pickup truck and R1S SUV, are built in Illinois and are eligible for the $3,750 credit.

“Until I can drive to and from Seattle without worry,” Mr. Dehner added, “I’m not going to buy a new electric car outright.”

His experiences are common. About 80 percent of people who bought an EV recently surveyed by Cars.com said the tax credit played a significant role in their decision to buy an EV and the vehicle they planned to buy.

Many industry experts and consumers have praised the law’s multipronged mission to curb greenhouse gas emissions, create jobs in the United States and reduce 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.

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

“For some reason, they’re making it complicated, but at the same time, it’s creating all kinds of confusion for consumers,” said Chris Harto, senior policy analyst at Consumer Reports. Guilty, this absolutely hurts companies that don’t qualify and helps companies that qualify.”

The reshuffling appears to be particularly tough on Hyundai, which also owns the Kia and Genesis brands.

Models such as the Hyundai Ioniq 5 and the Kia EV6 have won industry praise and impressed buyers with attractive designs and the fastest charging times among EVs. But they’re built in South Korea, so they don’t qualify for any federal tax breaks.

While sales of all Hyundai and Kia vehicles rose in the first three months of the year, sales of electric vehicles from those brands fell more than 25%, according to Kelley Blue Book. Electric vehicle sales overall soared to new highs in the first quarter and are on track to top 1 million units by 2023, now accounting for 7.2% of all new vehicle sales.

Credit rules have been changing rapidly. Genesis’ first U.S.-built model, the Electrified GV70 sports utility vehicle, began rolling off the Hyundai production line in Alabama last month after 16 hours of assembly. Genesis executives had hoped the model would qualify for the credits, but the car doesn’t meet stricter rules issued this week by the Biden administration.

To make up for lost tax breaks, Hyundai and other automakers are trying to lure buyers with leasing. Under the government’s broad interpretation of the law, even leased electric vehicles built overseas are eligible for tax credits and are exempt from government rules on battery component and mineral procurement requirements, household income caps and vehicle price thresholds.

Auto dealers can pass on business credit to consumers by lowering the price of the car in a lease transaction, which can reduce monthly payments. According to Volvo spokesman Russell Datz, as a rule of thumb for auto financing, putting the entire $7,500 credit toward a lease can save consumers about $225 a month over three years, or $125 a month over five years.

Gothenburg, Sweden-based Volvo sells two electric models in the U.S. that are built at a factory in Belgium and are not eligible for the federal tax credit. The automaker will start assembling a new SUV called the EX90 at its South Carolina plant this year.

Consumers are receiving money-saving messages. In the September after the law passed, only 7% of consumers had leased an electric vehicle, according to Edmunds.com. Leasing accounted for 34% of the EV market through March.

Gary Murphy, a retired educator in Castle Rock, Colo., rented an Ioniq 5 in February from a dealer who had learned the day before business credit.

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

He waited months for three different electric models that were in short supply before finding the Ioniq 5. When a car hits the market, many dealers are asking thousands of dollars more than the manufacturer’s suggested retail price.

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

The use of credits for leased vehicles has angered some automakers and lawmakers who say it subverts Congress’ intentions. Consumers can lease any EV with a $7,500 credit. For example, a couple earning over $300,000 a year (the tax credit income limit for married people) can lease a $148,000 Mercedes-Benz AMG EQS and claim a $7,500 credit, even if the car is German. Electric sedans that are built and well over the $55,000 price cap are eligible for the credit.

Treasury officials said their decision to allow tax credits for leased cars was legally sound. The Reducing Inflation Act exempts commercial vehicles to encourage rental car companies, local governments and other owners of car and truck fleets to buy electric vehicles.

Of course, many consumers prefer to buy and own a car, in part to avoid lease restrictions on how much they can drive and penalties for excessive wear and tear.

Jose Munoz, chief executive of Hyundai and Genesis Motors North America, insisted that losing buyer credit puts his brand at a huge market disadvantage. But Kevin Reilly, chairman of the Hyundai Motor National Dealers Council, said models such as the Ioniq 5 and Ioniq 6 will remain competitive despite financial hurdles.

The recently launched Ioniq 6 is the longest-range and most fuel-efficient mass-market electric vehicle in the United States. According to the Environmental Protection Agency, it can go up to 361 miles on a full charge and get 140 miles per gallon.

“I think our customers will be evaluating the whole picture, not just whether an electric vehicle qualifies for the credit,” said Mr. Reilly, owner and president of Hyundai Motor Co. in Alexandria, Virginia.

Mr Reilly said leasing had other advantages. People who are apprehensive about switching to a battery-powered car can try one without long-term commitments or worries about resale value. As EV technology advances and more affordable models hit the market, customers can easily upgrade when their leases are up.

Still, some car buyers say they will only buy EVs that qualify for the tax credit because they support the goals of the Lower Inflation Act.

Detroit entrepreneur Jonathan Quarles said he spends more than $150 a week filling up his Ford Expedition and driving his three daughters around town. He’s considering replacing it with an electric Ford Mustang Mach-E, which is eligible for a $3,750 federal tax credit. He said he has little sympathy for automakers whose cars don’t qualify for credit after decades of watching manufacturing jobs leave the country.

“My point is,” he said, “that you should start building these plants before you get credit.”



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