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EV tax credits are back — and bigger — in new Senate climate bill

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A new $4,000 tax credit for the purchase of a used ‘clean vehicle’

Photo by Andrew Hawkins / The Verge

Senator Joe Manchin has had a change of heart about electric vehicles.

The West Virginia Democrat, who previously described federal tax credits for EVs as “ludicrous,” announced a surprise deal with Senate Majority Leader Chuck Schumer on a reconciliation package that includes $369 billion for climate and energy measures aimed at slashing carbon emissions by 40 percent by 2030.

The bill would allow car buyers to continue to claim the current $7,500 federal tax credit for the purchase of “clean vehicles” — the new preferred phrase describing plug-in hybrid, battery-electric, and hydrogen fuel cell vehicles, replacing the old phrase “new qualified plug-in electric drive motor vehicle.”

It would also remove the current 200,000 vehicle cap before triggering a phase-out of the tax credit, a huge win for companies like Tesla, Toyota, and General Motors, which have all sold more than 200,000 EVs.

In an entirely new provision, the bill includes a $4,000 tax credit for the purchase of a used clean vehicle, a potential boon for middle and low-income car buyers who are less likely to be able to afford a brand new EV but are still hoping to switch to something less polluting.

And the bill amends the definition of eligible vehicles to include all vehicles manufactured in North America. A previous version of the proposed tax credits would have favored American-based manufacturers, sparking furious Canadian lobbying in Washington to get it changed.

Photo by Andrew Hawkins / The Verge

There are some limitations on who can claim a tax credit for a new or used vehicle purchase. The deal includes a cap on the suggested retail price of eligible vehicles of $55,000 for new cars and $80,000 for pickup trucks, SUVs, and vans. Credits would be capped to an income level of $150,000 for a single filing taxpayer and $300,000 for joint filers for new vehicles and at $75,000 and $150,000 for used cars.

Other vehicles not eligible for tax credits include those with batteries that contain minerals that “were extracted, processed, or recycled by a foreign entity of concern,” which is defined as a state sponsoring terrorism or countries blocked by the Treasury Department’s Office of Foreign Asset Control.

A previous proposal from President Joe Biden would have applied an additional $4,500 tax credit for electric vehicles made with a unionized workforce but was left out thanks to Manchin’s opposition — as well as opposition from non-unionized companies like Toyota and Tesla.

There are other new pots of money that are sure to thrill the auto industry, including a $10 billion investment tax credit to build clean-technology manufacturing facilities, such as an EV factory, and a $2 billion grant program to retool existing auto manufacturing facilities “to manufacture clean vehicles, ensuring that auto manufacturing jobs stay in the communities that depend on them.” And there’s $1 billion for clean heavy-duty vehicles, like school and transit buses and garbage trucks.

In sum, it’s most of what the auto industry and EV makers have been clamoring for for months. “This bill’s passage will create millions of good-paying American jobs in the clean transportation industry, drastically cut consumer energy and transportation costs, and boost public health by decreasing carbon emissions and other pollution,” Joe Britton, executive director of the Zero Emissions Transportation Association, said in a statement. “America owes a great deal of gratitude to all those who worked to negotiate this bill.”

But until Thursday, supporters were under the impression that expanded tax credits and other measures designed to increase EV sales were dead in the water. Manchin, a mercurial politician who has positioned himself as the deciding vote in a split 50-50 Senate, had dismissed efforts to subsidize the cost of EVs, calling the current tax credits “wrong” and “not American.” In March 2022, he said Manchin was “very reluctant to go down the path of electric vehicles” and derided the idea of the government spending money on infrastructure.

In a statement Thursday, Manchin described the so-called “Inflation Reduction Act of 2022” (gone is the Biden administration’s branding of “Build Back Better”) as a more comprehensive measure that “invests in the technologies needed for all fuel types — from hydrogen, nuclear, renewables, fossil fuels and energy storage — to be produced and used in the cleanest way possible.”

But the bill isn’t a total win for boosters of clean transportation. Tax credits for electric bike purchases were left on the cutting room floor after having been approved as part of the House-passed Build Back Better legislation. While electric vehicles are certainly more virtuous than gas-powered ones, e-bikes are even better for the environment, as well as for public safety. They cost less to manufacture and have the potential to replace short car trips that make up the majority of driving — especially in a time of high gas prices.