Biden's 'Buy American' Electric Vehicle Tax Credits Go Into Effect

The credits may be well-intentioned, but they will distort the market and lead to a windfall for U.S. companies.

In accordance with President Joe Biden's pledge that half of all cars sold in the U.S. by 2030 would use clean energy, the Inflation Reduction Act (IRA) established tax credits of up to $7,500 for purchasing electric vehicles (E.V.s). But in keeping with another Biden pledge, to double down on the ethos of "Buy American" by incentivizing American manufacturing, the credits are specifically tailored toward vehicles manufactured and sourced domestically.

After a three-month delay, those rules finally go into effect today. While consumers will struggle to find cars that qualify, manufacturers are set to make a killing in indirect taxpayer subsidies.

To qualify for a credit, an E.V.'s "final assembly" must occur in North America. If that sounds complicated for a consumer to figure out, the Department of Energy recommends searching individual cars by Vehicle Identification Number (VIN) "to identify a vehicle's build plant and country of manufacture." Past that, at least 40 percent of the battery's minerals and 50 percent of its components must be sourced either from the U.S. or a country with which it has a "free trade agreement." Those numbers will go up each year until they reach 80 percent and 100 percent, respectively. Meeting only one percentage requirement and not the other qualifies for half of the credit ($3,750).

The rules were written to exclude China. But China owns or controls the overwhelming majority of materials used in E.V. batteries. Not to mention, the European Union also lacks a free trade agreement with the United States. According to the Energy Department, only 14 vehicle models qualify for the full credit: five from Chevrolet, four from Tesla, two from Ford, and one each from Cadillac, Chrysler, and Lincoln. Some others qualify for half-credits due to sourcing requirements—for example, Ford manufactures the Mustang Mach-E's battery in Poland—but American companies noticeably account for every single qualifying vehicle.

That's a great deal for those four companies—Ford, General Motors, Stellantis, and Tesla—but a bad deal for everybody else. Numerous foreign automakers sell E.V.s in the U.S. but are disqualified from tax credits unless they build the vehicles domestically using parts sourced in a very specific way. Meanwhile, two versions of the Chevrolet Bolt—which uses outdated battery technology and was briefly taken off the market in 2021 when its batteries were catching on fire—qualify for the full tax credit under the new rules. So even though a consumer might find the similarly priced Nissan Leaf to be more reliable, a $7,500 tax credit might sway them away from it. That would be a boon to Chevrolet's bottom line as it still gets to charge full price for the car, and the U.S. government will reimburse the purchaser at tax time.

Not only do "Buy American" policies undermine the basic tenets of free trade, but they also risk ostracizing our international allies: Last year, French Finance Minister Bruno Le Maire charged that by adopting such specific requirements, the U.S. was "jeopardizing the level playing field" and risked a "new trade war." And French President Emmanuel Macron told Sen. Joe Manchin (D–W. Va.), a major proponent of the sourcing rules, "You're hurting my country."

Consumers should be able to evaluate the full range of options and choose the one that best suits their needs, at a market-determined price. And automakers should compete at the same level, whether they source their components from Poland or Poughkeepsie.