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Inflation Reduction Act in the USA: purchase premium for electric cars

Whether an e-car is tax-deductible depends on several factors. The complicated rules lead to a back and forth over the question of which models benefit and which do not, as the VW ID.4 and Tesla examples show.

In August 2022, the "Inflation Reduction Act" (IRA) was passed in the USA. Contrary to what its name suggests, the law is not only intended to reduce inflation and its effects. It primarily includes a long list of regulations for climate and environmental protection. In addition, there are tax reforms and innovations in statutory health care. The total financial volume: around 433 billion dollars, currently the equivalent of almost 405 billion euros.

With the IRA, a purchase premium for electric cars was passed. Formally, it is a tax credit of up to 7,500 (7,000 euros) that is deducted from the price when the car is purchased. There was one before, but the regulation has been adjusted: the previously applicable upper limit of 200,000 vehicles per manufacturer has been dropped. With the result that some models of the high-selling e-car manufacturers General Motors, Ford or Tesla are again eligible. Buyers of a plug-in hybrid also benefit from the purchase bonus, provided the car they want has a battery with a capacity of at least seven kilowatt hours.

Very strict requirements

The conditions that an eligible e-car has to have in the USA are very strict. First requirement: It must have been assembled in North America. The US Treasury Department has now issued further requirements. Accordingly, the first part of $ 3,750 only flows if at least 40 percent of the minerals required for the batteries come from the USA or countries that have a free trade agreement with the United States. The second half only exists if 50 percent or more of all battery components come from such nations. Both percentages should increase over the years, up to 100 percent in 2029. Cars with Chinese battery components should be completely denied the subsidy. China has consequently criticized the regulation and takes the view that it violates the guidelines of the World Trade Organization (WTO).

Because few of their own models currently benefit from the funding rules, the specifications are not at all to the liking of the US auto industry. Components from China or raw materials from countries that do not participate in a free trade agreement with the USA are currently installed in almost every electric car. Consequently, according to a statement by the car lobby association "Alliance for Automotive Innovation", not a single US electric car would be eligible for funding if the 2029 rules were already in effect. Tesla has already announced that some model variants of the Model 3 will already be available when the rules come into force on April 18.April 2023 would be excluded from funding.

Europe sees itself at a disadvantage

Japan and the USA concluded a trade agreement on battery minerals just in time, South Korea is aiming for something similar. According to the US Treasury Department, such contracts may in future be equivalent to a comprehensive free trade agreement. This is viewed very critically by some US politicians. Especially from Joe Manchin, who chairs the Energy Committee in the US Senate. "American taxpayers' money should not be used to support jobs abroad," says the Democrat, who is considered the driving force behind the strict subsidy guidelines, according to the Reuters news agency. The regulation ignores the intention of the IRA.

In Europe, which still has no free trade agreement with the USA after the TTIP talks were stopped at the end of 2016, the IRA is also viewed critically - especially the regulations on e-car subsidies. The EU Commission sees the tax breaks as a disadvantage for European companies and fears that local car manufacturers would prefer to invest in the USA rather than in Europe because of the rules. In response to the IRA, the EU Commission has now presented its own subsidy program: the so-called "Green Deal Industrial Plan" (GDIP).

Other subsidy factors

Whether the US tax premium is granted for an electric car or PHEV depends on other factors. It is only suitable for models with a purchase price of up to 55,000 dollars (standard car; around 51,400 euros) or 80,000 dollars (SUVs, pick-ups and commercial vehicles; just under 75,000 euros). And for buyers who earn no more than $150,000 (approximately €140,000) gross as an individual or $300,000 (€280,000) per household. There is a $4,000 tax credit for a used electric car that is "at least two model years old" and costs $25,000 or less. However, only if the new car subsidy has not already been claimed for exactly this car.

Due to the strict requirements, the list of fully eligible electric cars and plug-in hybrids was very short from the start (see table). After all, the first version not only contained products from US manufacturers, but also those from foreign brands such as Nissan and Volvo, which build the respective model for the North American markets locally. From Germany, Audi (Q5 plug-in hybrid) and BMW (3 Series and X5 plug-in hybrid) were initially beneficiaries of the new rules.

Stricter rules are in force

The list was updated at the beginning of February; it didn't get any longer though. Some - too expensive - models were eliminated, for example the GMC Hummer EV, Lucid Air and Mercedes EQS SUV. Others were added, including the VW ID.4.This was partly due to the fact that some models had previously been grouped into other vehicle classes and thus had the higher maximum price of $80,000 instead of $55,000.

But on April 18th, the new guidelines for batteries and the raw materials used in them came into force, causing the US tax office to significantly shorten the list. With the consequence that from that point on there were only 17 series from seven car brands, all of which came from the USA. The aforementioned manufacturers from Japan and Europe and Germany looked into the tube for the time being.

Speculations about the Tesla trick

But in the meantime those responsible at the US Treasury Department have apparently started to think about it again. With the consequence that the VW ID.4 and the BMW X5 xDrive50e of the model year 2024 ( post-facelift ) have returned to the list of eligible e-cars - as the only models that come from manufacturers who do not have their headquarters in have the US. One reason for this is that the ID.4 for the US market is built in Chattanooga (Tennessee) and the X5 is exported from Spartanburg (South Carolina) all over the world. In addition, with the electric VW, a sufficient proportion of the battery raw materials obviously comes from accepted sources. That's why he can even enjoy the full subsidy of $7,500 - with a list price starting at $38,995 (a good €36,400). In contrast to the BMW X5 xDrive50e, by the way, where only $3,750 is deducted from the list price.

There is currently confusion about this at Tesla. While the US Treasury Department is still showing individual Model 3 and Y versions with a subsidy of $3,750, according to the company's website, all model variants are currently receiving the full discount of $7,500. But how can that be when the basic versions - as is well known - are equipped with cheap LFP batteries (lithium iron phosphate) from China? It is not yet clear what trick Tesla used to do this. US media speculate that the Texans have discovered a loophole in the regulations. To put it simply, a manufacturer who brings enough cars with "non-critical" batteries onto the streets receives a kind of credit for specimens with "critical" batteries according to a highly complicated coefficient and can still offer the latter with full funding.

Tesla currently seems to be the only car manufacturer to have discovered this supposed legal loophole. Of course, it only works as long as Musk and Co. sell enough cars with compliant batteries. Nevertheless, other manufacturers are likely to follow the Tesla example - if the US authorities do not react more quickly and close the loophole before the rules, which are deliberately strictly formulated, can be overturned on a large scale through formalities.


US politics struggled for a long time until the "Inflation Reduction Act" was finally passed. It now exists and includes a subsidy for e-cars and plug-in hybrids. However, strict rules apply to ensure that electrified models are even eligible for funding. The list that includes such models is correspondingly short so far. After all, the VW ID.4 and the BMW X5 xDrive50e are back on it - as the only models from a foreign manufacturer so far.


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