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How The IRS Ignored The Inflation Reduction Act & Snubbed The Most Popular Electric SUVs From The Federal Tax Credit

The classification decisions made by the Treasury are not consistent with either the letter or intent of the Inflation Reduction Act, are unfair to full battery electric vehicles, and are confusing for consumers.

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On August 16, 2022, President Biden signed into law the Inflation Reduction Act that has supercharged the clean energy industry in the United States by investing hundreds of billions of dollars into promoting the production and use of clean energy technologies. One of the most prominent provisions, the EV tax credit, has a byzantine set of qualifications that has resulted in arbitrary snubbing of the most popular electric SUVs that has angered automakers, Tesla fans, and EV enthusiasts alike, setting off backlash against the IRS.

The EV tax credit provision of the Inflation Reduction Act extended the existing $7,500 tax credits for EVs and removed the cap for the number of vehicles a particular manufacturer could get credits for. The act encourages assembly of both the vehicle and the battery, as well the extraction and processing of minerals in the battery, to take place in North America through a complicated set of qualifications illustrated in the flow chart below.

There already was some controversy in the summer around the provision allowing a vehicle with only a 7 kWh battery to qualify for the full $7,500 tax credit, because such a battery might only add around $1,000 cost to a vehicle and such a small battery only allows the vehicle to travel 20–30 miles on electric propulsion, therefore minimizing the environmental benefits of such a vehicle. Today, however, the controversy is around the provision highlighted in pink in the flow chart that sets separate price caps for different types of vehicles ($80,000 for SUVs, trucks, and vans, and $55,000 for everything else).

The Department of Treasury and IRS published the list of vehicles and the associated price caps that apply just prior to the new year. Surprisingly, the top 3 most popular electric SUVs were categorized in this list not as SUVs, and therefore have a lower price cap of $55,000 instead of the $80,000 intended for SUVs. Specifically, the five-seat versions of the Tesla Model Y, the rear-wheel-drive versions of the Volkswagen ID.4, and the Ford Mustang Mach-E all were categorized not as SUVs. This caused quite a stir in the EV community — General Motors demanded that the Treasury reconsider the matter, and Tesla and other EV enthusiasts organized to submit official comments to the Treasury and IRS.

The text of the Inflation Reduction Act requires the Secretary of the Treasury to determine vehicle classifications “using criteria similar to that employed by the Environmental Protection Agency and the Department of the Energy to determine size and class of vehicles.”

Yet, the classifications adopted by the Treasury/IRS are not consistent with the EPA classifications (see below table with yellow highlights):

A Treasury spokesperson, when reached for comment for CleanTechnica, stated that “in determining how vehicles should be classified, the administration used CAFE standards, which are pre-existing—and longstanding—EPA regulations that manufacturers are very familiar with. These standards offer clear criteria for delineating between cars and SUVs.”

Understanding how the IRS arrived at an SUV classification that aligns with CAFE standards (which is administered by the Department of Transportation and NHTSA) that is different from the EPA’s fuel economy label classifications requires a deep dive into the code of federal regulations for the EPA and Department of Transportation. Specifically, the IRS and Treasury cite 40 CFR 600.002, which in turn also cites 49 CFR 523.5 for determining whether a vehicle is an SUV. To aid in understanding these regulations at a high level, the following flow chart summarizes how the regulations determine whether a vehicle is an SUV:

The regulations summarized in the previous flow chart describe what the EPA would call a “Truck SUV” in their latest report on automotive trends in greenhouse gas emissions, fuel economy, and technology from 1975–2022.

The report also identifies a separate category of car SUVs, which classify as cars according to federal regulations but SUVs under EPA’s Fuel Economy Labeling program in 40 CFR 600.315-08. See the below chart from the report for the categorization details.

The report from the EPA indicates that Tesla has the highest proportion of “car SUVs” in their lineup that would be snubbed from the SUV price cap by the Treasury. It also shows that only around 11% of Tesla customers choose 7-seat configurations that would qualify as “truck SUVs” with the $80,000 SUV price cap.

Moreover, the report indicates that a larger proportion of battery electric vehicles are considered “car SUVs,” while a very small proportion of plug-in-hybrids (PHEVs) are considered the same. Based on this, the Treasury interpretation of the rule disfavors full BEVs relative to PHEVs, reducing the environmental benefits of the electric vehicle tax credit.

In conclusion, the Department of Treasury decision to classify vehicles differently than the EPA despite the text of the Inflation Reduction Act requiring it to do so has stirred controversy among automakers and EV enthusiasts alike. The move seems to increase consumer confusion, as if the EV tax credit was not confusing enough already. Vehicles in the same car line with the same chassis/body are classified differently based on individual trims or configurations. The IRS interpretation of the law reduces the number of electric vehicles that qualify for the tax credit, and disfavors Tesla and full BEVs especially, which would result in reduced environmental benefits. It also snubs the most popular EVs from the higher SUV price cap: any 5-seat Tesla Model Y, the Ford Mustang Mach-E, and RWD versions of the VW ID.4.

The classification decisions made by the Treasury are not consistent with either the letter or intent of the Inflation Reduction Act, are unfair to full battery electric vehicles, and are confusing for consumers.

Perhaps it is not too late, however, for the Treasury to adjust course and make its SUV classification consistent with the EPA’s Fuel Economy Labeling program. Submit your comments directly to the Treasury here.

 
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Written By

Michael Grinshpun is a strategy analyst at a major utility focused on the future of the electric grid. Michael writes about the electric vehicle industry and works on sustainable energy issues. Previously, Michael has worked in water rate and conservation consulting, solar consulting, and energy facilities.

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