Washington bureaucracy could rescue Democrats from their EV tax credit problem

Hand-wringing that Democrats’ signature electric vehicle tax credit's battery and minerals sourcing requirements are too tough to use ignores a political reality: Washington knows how to get around its own rules.

To get a deal on the reconciliation bill that contains the credits, lawmakers had to agree that electric vehicles should be made with North American parts and minerals, even though it would rely on a U.S. supply chain that is in its infancy. Those rules allow lawmakers — including Sen. Joe Manchin (D-W.Va.), who insisted on the restrictions — to ride a tough-on-China message into the midterms. Democrats have a problem, though — they're so tough that no electric vehicle on the market would qualify.

But all it may take to unlock the tax credits Democrats hope will spur Americans to get rid of their gas guzzlers are some creative definitions — a bureaucratic specialty.

There’s already a playbook for getting around geographic sourcing requirements: A decades-long program called “Buy America,” intended to ensure road and transit projects are made from American-made materials. The requirements, especially for things like steel, which is produced more cheaply overseas, have been difficult to meet since its inception — and that’s exactly why they’re sometimes waived.

For instance, though Congress enacted stringent new Buy America rules in last year’s massive infrastructure law, they were immediately waived temporarily to give states and cities more time to adapt.

And the new sourcing requirements for electric vehicles that at the moment seem out of reach could go down the Buy America path, too. In fact, automakers and electric vehicle interest groups are already asking for more time before they're enforced.

The Zero Emission Transportation Association isn't looking for waivers, but Executive Director Joe Britton said the association and its members have been on Capitol Hill asking Congress to extend the compliance deadlines in the bill by 12 to 18 months.

“We want as much time as we can get,” Britton said. “My view is that every six months we can get as an extension is materially beneficial.”  

Where the rubber meets the road

In order to receive a tax credit for buying an electric vehicle, the budget deal Democrats are working to enact requires battery minerals to be at least 40 percent sourced from North America or a U.S. trading partner starting in 2024 and rising from there. And by 2029, battery components would have to be 100 percent made in North America.

Perhaps the most difficult bar, though, considering China’s dominance when it comes to lithium-ion batteries and other minerals and components the vehicles need, is the deal’s stipulation that the credit won’t apply to a vehicle that has any battery components made from an “entity of concern,” such as China, by 2024, and no critical minerals from those sources by 2025.

Not a single electric vehicle currently on the market would qualify. It’s not surprising, considering that the United States accounts for just 8 percent of global lithium-ion battery production, compared to China’s 76 percent.

In some cases, companies may not even be able to trace the source of minerals or subcomponents of their own products.

“We're an American company that makes American products and we believe that we comply with Buy America,” said Desmond Wheatley, CEO and president of electric vehicle infrastructure company Beam Global. “However, it's actually very, very difficult to actually know the provenance of the components and raw materials that you're using.”

“It's a minefield,” he added. “We're terrified that we might state that we comply and that somebody down the road may argue that we don't, because three or four levels of provenance upstream, it turns out that some things come from overseas and we didn't even know it.”

How those requirements could be waived, eased or fudged

The reconciliation bill does not expressly outline any waivers. But how the requirements are defined and applied by the Treasury Department and IRS could provide some wiggle room.

Britton of ZETA said that while “the law is the law,” Treasury has authority over determining how U.S. businesses are allowed to interact with “entities of concern,” for instance — and the IRS will decide how and when to calculate how much of a battery is foreign-made.

One infrastructure trade executive suggested that there may be even more need for exemptions for the electric vehicle credits than there is for Buy America.

“Maybe it’s not apples to apples but it’s comparing fruit,” said AASHTO executive director Jim Tymon, whose organization represents state Departments of Transportation, including those pushing for Buy America waivers. “With a vehicle or a battery it’s a much more detailed analysis to figure out where those materials are coming from.”

That’s because there are notable differences between Buy America requirements for infrastructure projects and materials like steel, where the requirements have existed for years and the supply chain is well understood, and requirements for private automobile companies to source their battery components from a supply chain that currently doesn’t exist.

Tymon said the temporary waiver DOT put into place allowed infrastructure projects that were in the planning process for years to proceed this summer. Without it, some projects faced delays.

“We understand there’s kind of a chicken or egg situation here,” Tymon said. “If we’re not able to prove to America and Congress that we can get dollars out there in the community, that doesn’t bode well for us when we have to go back to Congress and push for a similar level of investment.”

GM CEO Mary Barra acknowledged on Thursday that while the domestic sourcing language in the reconciliation bill “will help drive further investments in American manufacturing and sustainable, scalable and secure supply chains,” those goals “cannot be achieved overnight.”

Republicans who do not support the reconciliation bill are attempting to make the mineral sourcing requirements even stricter.

Sen. Marco Rubio (R-Fla.) plans to file an amendment to the bill that would require electric vehicles to source 100 percent of their battery and battery components from the U.S. or a country where the U.S. has a free trade agreement immediately, rather than allowing for a transition period. Rubio’s amendment, if adopted, would make electric vehicle tax credits unattainable for years.

But no Republicans are likely to vote for the bill, and the bill language is unlikely to significantly change, given the delicate balancing act it’s taken to get all 50 Democratic senators to sign on.