An In-Depth View of the Inflation Reduction Act's Clean Vehicle Credits Transcript

KRISTIN DZICZEK:Welcome, everyone. My name is Kristin Dziczek. I'm a policy advisor here at the Federal Reserve Bank of Chicago. I'm in Detroit. And we are here for a webinar on the Inflation Reduction Act and the clean vehicle credits. And we're going to dig down into some of the things we learned last week with new guidance coming from the Treasury Department.

I will get started here with my presentation and see if I can get that shown. OK. Give me just a second to move this over. OK, great.

So the clean vehicle policy world has really been very busy lately with all of the money for strengthening the grid and building out charging infrastructure across the country-- that's in the in the Infrastructure Investment and Jobs Act, or the IIJA-- to the clean vehicle incentives in the inflation Reduction Act that we'll discuss today. And we expect to hear about future fuel economy and greenhouse gas emissions very soon as well.

Today, we have two of the most knowledgeable people to walk us through the clean vehicle purchase and manufacturing incentives. We have Dave Schwietert from the Alliance of Automotive Innovation and Andy Koblenz from the National Automotive Dealers Association. I'm going to give a more formal introduction in a little bit.

But first I want to start with my disclaimer. What we are talking about are pending regulations. And the Federal Reserve does not take a position one way or the other on these proposed rules. We're here merely to explain what they say and to moderate this discussion with our experts. And any views I will express here are mine alone and do not represent the Chicago Fed or the Federal Reserve System.

So let's get started. The Inflation Reduction Act passed last fall-- or last summer-- August 16th, 2022. Some of the provisions were taking immediate effect, such as the requirement that any clean vehicles receiving a credit had to be made in North America. Some will kick in over the next few years. And the provisions we learned about last week are going to go into effect April 18th.

I've provided a link to the law and some of the pronouncements and guidance that have come out since the law was passed. And, yes, the slides will be available on our website after this event is concluded.

The IRA is a broad-based piece of legislation. It covers a wide range of topics, including provisions aimed at addressing climate change, prescription drug prices, corporate taxes, and tax enforcement. But the things we're going to dig into are the clean energy manufacturing credits and the clean vehicle incentives. And those are for battery electric vehicles, plug-in hybrid vehicles, and fuel cell electric vehicles. So that is what a clean vehicle is now defined as. We're going to drill down into those last two.

And a word of caution. This is a bowl of alphabet soup. The IRS tax code is just like that. And our presenters may use letters and numbers as shorthand in today's presentation. So I thought it would be good to start with a quick review of what those are.

So first, there are the provisions that are applicable to purchasing a vehicle or leasing a vehicle. And those are 30D-- that's the new retail clean vehicle credits. Then there's 45W. That's commercial vehicle tax credits. And then 25E, and that is for used clean vehicles. So those are all about acquiring a vehicle.

Then there are some provisions around manufacturing. There's 45X. Those are manufacturing tax credits for making battery cells and critical minerals. And they also cover some things like solar and wind power. 48C, which is an advanced energy project credit.

There's the ATVM program. That's been around for some time, about a decade or so, and that's a loan program that the Department of Energy runs. And then there is what I'm calling the DMCG, the domestic manufacturing conversion grants. No one calls it that, but I wanted it to look nice on the slide. So I just call them the DMCGs now. We probably won't use that as a shorthand, but all of those other letters and numbers will be part of the presentation today.

So 30D is the program that gives buyers up to $7,500 in tax credits for acquiring a clean vehicle. And as you can see from the comparison chart, it has the most requirements, including that the vehicle has to be assembled in North America. There are price caps on the vehicle, for whether it's a car at $55,000 or a-_ anything else pretty much-- a truck or an SUV or a CUV. Those are $80,000. Those are flat numbers. Those are not going to adjust with inflation.

And then there are modified adjusted gross income caps for the buyer. They have to be under $300,000 for married filing jointly or $150,000 for single. There are critical minerals and battery content-- battery component content rules-- that go into effect. And there are prohibitions on using those minerals or components from what is called a foreign entity of concern. And we'll get into each of these in detail in a few minutes.

That's compared to 45W, which you can see has a few less requirements. The 45W is a program that gives commercial buyers for light vehicles up to $7,500 in tax credits for acquiring a clean vehicle. It shares many of those same requirements, but it adds one that the vehicle must be for business use. I'll make a point that 45W also covers larger, medium, and heavy-duty vehicles, but we're not going to talk about that today in too much detail.

The 25E, the far right column-- you see that it shares many of the same requirements at the beginning. The first seven requirements are common. It also has income and price caps. The price cap is $25,000 on used vehicles, and the income caps are half of what they are for the new vehicle purchase. It adds two more requirements, and those are that the vehicle must be at least two years old and the first resale has to happen after the enactment of the IRA.

So this is a nice handy chart. We may come back to this and refer to it when we're looking at those differences between the three programs on acquiring a vehicle.

Last week, we were hoping to hear about these three things. These are a little bit unclear in the legislation itself. And Treasury has been tasked with further defining and clarifying what these things mean. So half of the $7,500 credit comes from meeting the content requirements for critical minerals. Half comes from meeting the content requirements for battery components. And then there is that foreign entity of concern thing that we're looking for some guidance from Treasury on.

So let's look at what a critical mineral is. And, yeah, this is not science class. I'm sorry.

There are two lists in the legislation, and one is critical minerals. And that's these in green. And then there's something called "Other," and that's these that are in blue. And this includes 48 of the elements and two compounds. That's about 40% of the periodic table that's covered by the critical minerals and others.

The IRA says that these minerals must be extracted or processed in the United States or a country with which the United States has a free trade agreement or recycled in North America. So that's the requirement. On the 30D thresholds, you can see that the thresholds ramp up, and the vehicle must have an increasing share of its critical minerals sourced from North America or our free trade agreement partners.

You'll also note that Japan is now in the list of free trade partners from their executive agreement that was passed between our two countries a few weeks ago. And importantly, after 2025, there can be no critical minerals extracted, processed, or recycled by a foreign entity of concern.

So let's look at the battery component requirements. Let's start with what is a battery component. These are the active materials inside a battery cell that helps convert chemical energy to electrical energy. Then there's the battery cells themselves. That's a single unit that has all the components in it. And then there are modules. And a module is two or more cells that are linked together and configured.

There are also battery packs. That's two or more modules and the protection system and packaging that goes and installed in a vehicle. So basically components are everything short of a pack-- in some cases. Because some of those things that are active materials in the battery are also critical minerals. So there's some lack of clarity on that, which I hope that our panelists can get into and talk about. So there's still a lot of questions left.

So we'll move forward to what the component requirements are. Like critical minerals, the law is requiring increasing battery component content year over year. Unlike critical minerals, those thresholds reach 100% by 2029. And also unlike the critical mineral targets, the components must be assembled in North America only. There are no free trade partners in this.

There is also the foreign entity of concern requirement. But that kicks in one year earlier-- 2024 for components versus 2025 for the critical minerals. So I've said this foreign entity of concern thing a few times without really going into what that means. So let's do that now.

The legislation refers to a list that is kept by the US State Department. This is a list of countries that-- and I'm going to read directly from the text-- "are involved in torture, prolonged detention without charges, forced disappearance, or other flagrant denials of life, liberty, and security of persons."

There are 12 countries currently listed. And really only one is a significant source of battery critical minerals and components, and that is China. There's this nice chart that Bloomberg put out a week or so ago showing China's dominance in the various aspects of battery industry. China is in black on this chart, and the US is hot pink. And there is not a color for Mexico or Canada.

I also want to be clear about how IRA defines a foreign entity of concern. It's an entity that is owned by, controlled by, or subject to the jurisdiction of direction of a government of a foreign country that is a covered nation. Unfortunately, last week's guidance provided really no more information other than these rules will be adjusted in future guidance. So we're still waiting to see what exactly that piece means and what does it mean to be owned by, controlled by, or subject to a foreign entity of concern.

I'm going to come back now to those manufacturing requirements. The Treasury guidance did not touch on these. But I want to review them quickly so that you have a sense of what other supports are in place to support the transition to clean vehicles.

There's 45X. This is a production credit of up to $45 a kilowatt hour for battery cell and modules. It also covers 10% of the critical mineral costs. 48C provides tax credits to manufacturers of battery electric vehicles, plug-in hybrids, and fuel cell vehicles-- also energy storage and fuel cell equipment.

The ATVM program, which has been around, as I said, for a while, was revamped with more funding and some different requirements for the low-interest loans that are available to manufacturers. And then there's the domestic manufacturing conversion grants. That is to re-equip, expand, or establish a plant to make not only clean vehicles, but hybrids is included in that as well.

One last thing before I hand over the reins to our presenters today is to go over the timeline. When the bill was signed in late August, the North American assembly requirement for the 30D program went into immediate effect. And the credit was up to $7,500 based on the previous 30D program's battery capacity rules.

Treasury's guidance and white paper in December, on the 12th and the 29th, clarified some more of the rules and made it clear that leased vehicles would qualify under 45W with a commercial vehicle credit. You'll recall that had fewer requirements about income and component and critical minerals and content and all of that.

So that program went into effect on January 1st with the price and income caps, and then the previous production limit of 200,000 vehicles per manufacturer was lifted. And that allowed purchasers of General Motors and Tesla vehicles to again qualify for these credits.

The thing that came out last week, March 31st, was an unpublished notice of proposed rulemaking. It was published, but it was unpublished. Hmm. And it's set to be published in the Federal Register on April 17th. That gave manufacturers some time to look at what this guidance would be and to work during this period to see which of their vehicles would continue to qualify given the increased guidance and clarification of the rules.

So the next day, April 18th, after it's published, these content rules will go into effect. And since this is still a notice of proposed rulemaking and not a final rule, there is a period for comments from the public and from industry. That ends on June 16th. Some time after that, there will be an interim final rule and eventually a final rule.

There's still a lot of steps to go through, and a lot can change before all is said and done. And there are still many unanswered questions, such as what counts under the foreign entity of concern and what the final regulations will look like and what guidance can consumers rely on when the rules are a little bit in shift. So we'll do our best to explain what we about the current state of play.

And with that, I would like to introduce my friends, Dave Schwietert and Andy Koblenz. These are both experts that I call upon to help me understand all of this complicated maze of legislation and regulation. And Dave is the chief policy officer at the Alliance for Automotive Innovation. That's the Washington lobbying association for most of the automakers and a bunch of suppliers. And Dave works on the Alliance's legislative and regulatory agenda on a host of industry, market, and technology topics. He'll be up first.

And then we'll turn it over to Andy Koblenz. Andy is the executive vice president of legal and regulatory affairs at the NADA, National Association of Dealers, and the association's general counsel. He too is responsible for a wide range of issues, representing dealer interests before the Federal agencies. So with that, I'm going to stop presenting, and let Dave take over.

DAVE SCHWIETERT: Kristin, for the setup, I'm going to throw my slides up in just a moment. But really appreciate the opportunity to join you and Andy today. I think this webinar is wonderful.

And I'm really going to build from where you left off setting the stage, which was a great recap on IRA and related policies. Let me throw my screen up, and this should be on in a second.

Or maybe not. Standby. Let me make sure it's coming up here.

All right, Kristin. I'm going to switch to presenter mode, so hopefully that is working for folks in the webinar. OK. Well, sorry for the--

KRISTIN DZICZEK: Your screen is really small. OK. Now it's good. Sorry.

DAVE SCHWIETERT: OK. Thank you, Kristin, and apologize for the delays there. So obviously, as Kristin noted, I represent the Alliance for Automotive Innovation. As Kristin explained, we obviously are the lobbying arm of the auto industry-- not just mainline manufacturers, but also tier-one suppliers, battery manufacturers, as well as technology and mobility companies that are really driving a cleaner, safer, and smarter future.

Kristin, I thought it was useful to give a perspective in terms of what's happening in the market-- and I'd like to rewind a little bit-- that's really influencing a lot of what we've seen out of not only Congress but the Biden administration. And if we go back to the summer of 2021, that was when the president outlined through an executive order a desire to see 50% of light-duty auto sales by 2030 be electrified in one way, shape, or form.

And in this box of the screen that you're seeing in front of you, the industry itself came to that event to embrace the president's commitment, underscoring that the industry with the right complementary policies in place, was poised to accept that challenge of driving EV purchases between 40% and 50% by 2050.

And this map, Kristin, which, of course, is linked-- and these slides will also be available for participants-- underscores that significant financial commitment that the industry is making. $110 billion of US investment by automakers and battery manufacturers since '17, $1.2 trillion of global investment related to electrification. And then obviously, it's showing the significant expected increase in battery capacity in the coming years.

But if we rewind a little bit, it's also important to understand that over the last three years, electric vehicles-- those that are battery electric, plug-in electric, or fuel cell-- have accounted for a little over 2%, 4%, and then this past year in 2022, just over 7% of all light-duty vehicle sales in the US. Now, of course, that's increasing significantly.

But it's also driven not only by the consumer behaviors, but also what's happening from a regulatory standpoint. And this slide is my simplified way, Kristin, of really explaining to folks two things. First in green, what you're seeing here is what is known as the California ACC II requirements for increased zero-emission vehicle requirements.

California has adopted these, set them in motion-- effectively requiring 100% electrification by 2035. There's a handful of states that presently follow California that may follow suit. That represents a little over a third of the US light-duty market. And then in orange underneath, what I've done here is to basically extrapolate what the federal requirements for electrification would otherwise look like if you were to write those over some of what California has done.

So what you see in orange is effectively to reach the administration's 50% goal by 2030. This is a linear representation of what those percentages of electric vehicles would look like. So I think this is really important as we're talking about various Inflation Reduction Act incentives, as well as other manufacturing grants or loan authorities, of what it's going to take to assist the industry down this path towards increased electrification.

The slide here helps to underscore at least the current environment for vehicle prices. I'll note two things, Kristin. One is that the average electric vehicle at the end of December of last year was a little over 61,000. The average price of all vehicles was a little over 49,000. So again, I think these are important figures to keep in mind, knowing that if you look at the price increases end of '21 to beginning of '22, there was about a double-- 5,000-- increase for electric vehicles because of cost inputs compared to all vehicles, which was around 2,500.

And then this slide here is really a nice way to encapsulate what it's going to take as it relates to critical minerals, not only for extraction processing but ultimately batteries, to meet some of those increased requirements in the future. I will leave you with this sentiment is that the slides in front of you are from Benchmark Minerals Intelligence. They do a really nice job of breaking down what would be required.

And in essence, over 300 new mines will be required to meet the global battery demand by 2035. So that helps to underscore really the importance of policies that we're talking about today in the Inflation Reduction Act and other things that Congress and the administration are doing to help bolster US supply chains as well as bridging from existing requirements or obligations out of China and other countries.

Now turning to the Inflation Reduction Act, Kristin, you noted this in your overview slide. And I'd like to focus on this before I turn it over to Andy to talk more specifically about some of the consumer-facing incentives.

As part of the Inflation Reduction Act, there was something that is known as the advanced manufacturing production credit. This is known as 45X. It creates a very robust incentive for people to effectively produce materials, particularly in the vehicle side of things, including electrode active materials, battery cells at $35 a kilowatt hour, battery modules at $10 per kilowatt hour, and applicable critical minerals.

So again, while a lot of attention has been given to things like the 30D purchase incentive or 45W and other provisions in the Inflation Reduction Act, there's the other aspect of the IRA that's really focused on bolstering US manufacturing capabilities. And not only as you saw from some of my earlier slides in terms of just the significant investment that's occurring, these incentives in the Inflation Reduction Act will really bolster or sway manufacturing to locate here in the United States as it relates to producing battery cells modules, critical minerals, and electrode active materials because of the production tax credit in the Inflation Reduction Act.

Again, I'm only focused on the auto aspects. But as Kristin noted, there's other provisions. The IRA had over $270 billion over the next 10 years of incentives related to environmental incentives out of a total of $369 billion in the overall bill. So it gives you a sense of scale.

Now, in addition to certain manufacturing incentives like the production tax credit, there's also incentives in the Inflation Reduction Act for alternative for fueling property credits. These are akin or necessities of the increased electrification because it's one thing to produce vehicles. But we also need to ensure those vehicles can be accessibly refueled, recharged, refilled.

The alternative fueling property credit, 30C, expands the allowable cost for potential tax credits of alternative refueling property. Kristin, this is also the incentive that's available to consumers capped at $1,000 if they were to utilize 30C as it relates to installing charging infrastructure at their home.

Now, the chart to the right really helps to amplify the need for charging and refueling infrastructure. This underscores the publicly available charging infrastructure across the country-- a little over 100,000 ports that are otherwise not proprietary. So this is going to be important in the future because as increased vehicle production occurs, those vehicles are going to need to be charged.

While vehicles by and large-- 80%-- are refueled or recharged at home or work, the public charging is going to be a key component as it relates to addressing some of the public concerns about range anxiety and the like.

Now, I will say, Kristin, pivoting a little from the Inflation Reduction Act, there was also in the bipartisan infrastructure bill that Congress passed, about $7.5 billion that the Congress and the administration are currently implementing over the coming years to really create a charging infrastructure that's seamless across the country in terms of 5 billion going to states over five years and formula dollars.

These charging locations have to be spaced along interstate highway corridors that are eligible on the highway system. And then there's another $2.5 billion in competitive grants that will be issued. Now, I know with Andy speaking next, folks like National Auto Dealers Association are also contributing as it relates to expanding some of that charging infrastructure. I believe they're estimating about $2.5 billion of additional investments, just from the dealership side to also expand.

So again, these are the public dollars, a sentiment of what's being done by folks like NADA and others, knowing that there's also a significant role of the private sector to expand that charging infrastructure as well.

All right. As I wrap up, Kristin, I we're obviously focused on a lot of the 30D tax credits, the latest Treasury guidance. What I'd like to focus on is the fact that there's a lot of questions about, well, how many vehicles qualify today? Or more importantly, how many vehicles will qualify after April 18th when the new content provisions kick in?

The simplest way to look at it is that we believe from the association standpoint that we're really at the highwater mark right now. Because of the new requirements in the Inflation Reduction Act, whether it's North America content, MSRP, or income stipulations, only 43% or 39 out of 91 electric vehicles for sale in the US today, are currently eligible for that $7,500 credit. Now, on the right hand side, you're getting a breakdown of what those vehicles look like in all sizes and all models.

But in conclusion, it really remains to be seen how many vehicles will qualify for the 30D credit, whether it's the full $7,500, half of it, or none at all once those content provisions kick in on April 18th. What I will say-- and really commend Treasury and the IRS for-- is the fact that they are providing a centralized website that will help to address some of the confusion between consumers or dealers in terms of the potential vehicles that qualify.

On a monthly basis, automakers are required to give IRS breakdowns by vehicle identification number of the vehicles that qualify for 30D and other programs. So as we transition from the current 30D into the new content provisions that apply starting April 18th, we're expecting to see some type of changes as it relates to the potential reduction in overall vehicles, as well as how much of that credit that a consumer might otherwise be able to take advantage of, presuming they have requisite tax liability.

So, Kristin, as you said, there's going to be a 60-day comment on the latest content provisions from Treasury. We're certainly going to avail ourselves to commenting on a number of things. But at the end of the day, there's no question that various programs in the Inflation Reduction Act, as well as bipartisan infrastructure, will help bolster domestic supply chains and battery production. But it's all going to take time.

And a lot of the statutory requirements in the Inflation Reduction Act don't necessarily line up line for line as it relates to what's happening in the market. But with that, Andy, I'd love it turn it over to you knowing that I expect we'll have a number of questions and tag teaming as it relates to many of these provisions.

ANDY KOBLENZ: Sure. Thanks, Dave. And let me add my appreciation for the opportunity to be here. As Kristin introduced me, I'm Andy Koblenz with the National Auto Dealers Association. We represent the franchise new-car dealers, all brands, of new car dealers in the United States. And as I said, we're very happy to be here.

The dealers in this country are all in on EVs. As Dave alluded to, they're making fairly substantial investments in getting ready for EVs, including putting charging stations equipment in their dealerships, but also getting the other tools and training that's necessary to be ready for the onslaught of vehicles that is starting to arrive today and is just going to increase over the coming months and years. We projected those numbers are somewhere between two and five billion, and it may go up from there.

Dealers are not only all in on EVs, but they are truly essential to the broad distribution of them once we get into the mass market. They are the pathway because they are the ones who are going to have to try to take all this complicated information that we're sharing to try to help the consuming public understand it.

They're ready to do that, and what I'd like to do for the rest of my presentation is to try to do that for the listeners on this webinar, to try to translate this into what a consumer will see and needs to understand and know when they go to acquire a new vehicle. As both Kristin and Dave alluded to, there are three major incentive programs that are contained in the IRA, and I'm going to touch all three of them.

The first one we've been talking about is 30D. And I think the simplest way to think about that from a consumer perspective is that there are actually three buckets of requirements that 30D establishes. Those requirements that need to be met by or are in the province of the manufacturer. And Kristin's chart put up a lot of those. Those bucket that are in the province and in the control of the consumer itself. And a third bucket, that which is the responsibility of the dealer.

With respect to the manufacturers' bucket, from a consumer perspective, it's really not important for the consumer to understand why a vehicle either does or does not qualify for a certain level of tax incentive. All that the consumer needs to know is the answer. Does this vehicle-- it's not important to a consumer whether it's because there's mineral content is at the right percentage or whether the battery components are the right, it was assembled or not in North America.

All the consumer really knows is what is the answer. Is this a qualifying, and if so, at how much? And on the 18th of April, the number of possible answers gets reduced. Under the old rules, you could have a very variable amount, although most were at the $7,500 level. But starting on April 18th, there are only three answers.

Either the vehicle qualifies for $0 in credits, it qualifies for $3,750, or it qualifies for $7,500. And we are hopeful that the IRS is going to provide that-- update that website that Dave alluded to to make it really easy to look up by make, model, and ultimately someday by VIN exactly what the answer-- this vehicle qualifies for one of those three numbers. So that's the only thing a consumer really needs to about the manufacturer-controlled piece of it. What's the answer?

From the consumer's personal side, there are actually three things that they need to be focusing on. One is they have to be acquiring the vehicle not for resale-- not to flip it to somebody else, but to use it themselves. That's a requirement and qualification with the credit.

Secondly, they have to look at their own income and make sure that they're under the adjusted gross income cap that Kristin laid out in her presentation. And they also need to have affirmative tax liability in the year that they're purchasing it because this is a non-refundable credit. So those are the three things that the consumer needs to focus on themselves. The whether they're using it not for their own purposes, whether their income is low enough, and whether they have affirmative tax liability to offset those dollars when they come.

And they do-- those dollars until we'll get into the 2024 situation, but in 2023, the actual delivery of the dollars to the consumer doesn't occur at the time of the sale. It occurs when they file their taxes, presumably in 2024, in April of 2024 or later.

The final bucket under 30D is the dealer. What the dealer's responsibility is the dealer has to ensure that this is the first use. This is a new vehicle being sold. That's a requirement in statute.

The dealer also is responsible for providing a form that has certain disclosures to the consumer. If the form is not given to the consumer, then consumer cannot claim the credit. Those disclosures are rather straightforward. It's the VIN, the Social Security number of the purchaser, the name of the purchaser, information about the dealer selling it, the battery capacity, the maximum amount of theoretically available credit, and the fact that this is the original use.

These forms already exist. And the dealers have been using them since January 1st for those vehicles that did qualify then. But it is a requirement.

And then finally the dealer will be responsible for filing with the IRS at the end of the year in which these sales are made, a form reporting all the information regarding the vehicles they sent. So the best way to think about the 30D and answering the questions is manufacturer requirement-- $0, $3,750, or $7,500. It doesn't matter how you get there-- what's the answer?

Two, consumer-- not for resale, is my income low enough, and then do I have tax liability? And three, did my dealer give me the form that I needed to do. And then the dealer will take care of the other items for the dealer. So that's where we are on 30D.

As Dave alluded, we do expect that come the 18th of April, the universe of vehicles that are eligible, that have a number that's not $0 in that first question, is going to shrink. We don't know by how much. Some of the OEMs have announced that some of their vehicles are going to qualify. Some said that it's at the $3,750. Some say it's at the $7,500.

But we'll see. We won't until the manufacturers have the opportunity to work through all the new rules on minerals and battery components to figure out exactly what those numbers are. And that information will start coming out into the market soon. I think they're required to file by the 15th of April and maybe filing a couple of days earlier that information. So we should be watching that website that Dave mentioned to see if the vehicles on it change.

So let me move to the second of the two incentives that I think consumers will start to see a benefit from, and that's the 45W. As Kristin indicated, this is an incentive for people who are buying for commercial purposes. So let me start by identifying that there are definitely people who buy light-duty vehicles in small numbers at dealerships for commercial purposes.

There are people who run landscaping companies who are buying pickup trucks and the like. So there is a direct commercial purchaser universe that will be taking advantage of the 45W in the light-vehicle range at the nation's dealerships. And as Kristin alluded, the eligibility for the tax credit under 45W does not have as many filters in it, as Congress saw fit to not put as many filters on the commercial one as they did on the 30D.

What's not present in section 45W is there's no MSRP cap. There's no income cap for the acquiring person. There's no North American assembly requirement. There's no minerals limitation. There's no battery component limitation, and there's no entity of concern limitation. None of those are present in that.

One of the applications of the 45W is the process of consumer leasing. In a consumer lease, the vehicle is actually purchased by the leasing company and is depreciated by the leasing Company and then is offered through the dealer to the consumer under a lease arrangement. And these-- it is now clear from the government's pronouncements at the end of last year that consumer leasing is eligible to be used for 45W.

And it is-- we're actually seeing it in the marketplace. There are a number of lenders-- some of them owned by Dave's members, the captive finance companies of the manufacturers-- but others who are banks out there who are typically in the world of automotive finance-- auto lending and auto financing, who have offered program-- lease incentive programs. And they are--

So that's why everyone I've seen is offering it at the full amount of the available credit. The credit can be up to $7,500. For 2023, the only limitation that could lower it below $7,500 for virtually all vehicles is if the selling price of the vehicle is less than $25,000. There's a cap of-- it has to be 30% of the selling price. But if the selling price is over $25,000, then you've hit the other cap that exists-- $7,500.

So these are going to be largely in the $7,500, and what we're seeing is lease programs where either the capitalized cost is incentivized down by $7,500, or sometimes the residual value is pushed up by $7,500. Those are two of the paths that you can do to push the available money into the lease program and create a more attractive lease program for someone who would be acquiring it through a lease.

The one aspect of this that is interesting and I think is going to be attractive to consumers is that the way the lease incentive works is that the taxpayer involved is the leasing company, the financial institution. And that means that neither the consumer nor the dealer needs to interface with the IRS. There will be no filing of taxes by the consumer to acquire the $7,500 that is available for leases. That will all be done by the leasing company that will apply that credit to its own taxes.

It is true that just like in the 30D where the consumer as the taxpayer and had to have affirmative tax liability that the financial institution needs to have affirmative tax liability to use the credit to offset. It's not refundable to the financial institution either. But as I said, from a market perspective, the consumer just sees it as an incentive in the lease and does not have to interact with the IRS. And I think that will make it just an easier process for both the dealer and the consumer to take advantage of.

One other thing we've noticed is there's not a lot of used vehicle leasing in the market today. But there's nothing in 45W that limits its application to new vehicles. As long as there was no new vehicle tax incentive, a 30D tax incentive taken on the vehicle, it appears that the 45W incentive can be taken by a leasing company that is acquiring and leasing a used vehicle. So we may see down the road a very effective tool to get used EVs into the marketplace further, which will, of course, create a new room for new EVs to come in behind them. Or it's where the used EVs get pushed when the new EVs come in.

So that's kind of the overview of the 45W. And as I said, we're starting to see it in the marketplace already. If in fact the universe of vehicles eligible for the 30D credit moves down from the 39% or 41% that Dave identified earlier down into the lower percentages-- 10, 15%. If that's what occurs, we may see more as this will be an attractive way to help get the EVs into the market and consistent with the legislation the Congress enacted.

The final incentive that's out there is a new one. We've never seen this before, which is a-- by the way, the leasing incentive existed under the old 30D, so that's not a new incentive. It's just that they broke it out into two pieces in the new statute.

We never saw a used purchase incentive before, but now we have it. It's section 25E. As Kristin's chart at the beginning identified, there are some threshold requirements. There are income caps, and they are much lower than the purchase caps for the new vehicles. They're half, basically-- $150,000 for a family and $75,000 for singles.

The vehicle cannot be transacted-- it's not an MSRP cap, but it is a sales-price cap. The vehicle cannot trade for more than $25,000, and it must be the first used vehicle sale-- the first sale as a used vehicle for this vehicle to occur since August 17th of 2022. And it can't be the second or third time that it's changed hands as a used vehicle. It has to be the first time as a used vehicle.

So this will apply to EVs that are currently in the market. There are a number of EVs out there. There are many Tesla EVs out there. There are Chevy Volts. There are Nissan Leafs in some quantity, and they could be acquired if you meet those other requirements, although it does have to be purchased from a dealer.

So that's an overview. I don't think we've seen a lot of 25E activity yet. I think there's less awareness of that in the marketplace, and those other requirements may also be a little bit of a hindrance to its applicability. But we do expect to see some more of that.

So that's kind of my overview of the three credits and where they stand in the marketplace. So, Kristin, I'll toss back to you. And I'm happy to take questions, and we can also talk about sort of what else we need to hear from from the agencies so that we can clarify some of the remaining pieces of the IRA.

KRISTIN DZICZEK: Well, thank you both. Dave, Andy, that was very comprehensive. I think we had a few questions we were answering in the chat. And I grabbed most of those. If I could answer them right away, I did. But ones I want to pose to you guys, I've written them down. And we'll get started here into our discussion.

The first thing, and that's sort of where you ended, is the March 31st guidance answered some questions. But there were many questions that remain unanswered. And so what are the ones that you're really watching, and when do you expect we'll know more about those issues? Like what exactly is a foreign entity of concern, and what is placed in service versus the born-on date of the vehicle? And if it was made in 2023 but sold in 2024, how does that work? Because many vehicles go over the year. Or will we just have a December to remember, Andy--

ANDY KOBLENZ: Exactly.

KRISTIN DZICZEK: --pushing a lot of vehicles out in the last month of the year. So if you guys want to just jump in and tell us what are the things that remain unanswered that you are waiting for.

DAVE SCHWIETERT: Sure. Andy, I might go first, and I'll let you answer the one on the-- obviously the born-on date and/or the placed in service. I know we have shared minds on that.

So, Kristin, the first one's a really good one. And that's basically what's still yet to be understood. And I'd say the biggest thing is with the latest critical mineral battery component thresholds, obviously manufacturers are going to need to validate. And obviously by the 18th, they're going to have to tell the public and IRS which vehicles qualify. If they don't submit that information, effectively a vehicle that's eligible today becomes ineligible is how I read it. So I think everybody should understand that.

In addition to the content provisions, which, of course, increase year over year-- currently 50% for batteries, 40% for critical minerals-- it's really that point that you just raised. What is the plan of the administration as it relates to defining what a foreign entity of concern is? In statute, that provision starts to kick in January of '24 and then January of '25 for critical minerals.

But January of '24 is right around the corner. So the longer it takes for the administration-- Treasury, Department of Energy, and others-- to issue that guidance, the harder it's going to be for manufacturers to attest that they're meeting the VIN requirements for content. And again, Kristin, these reports that manufacturers have to give the government on a monthly basis are done so under the understanding that under the penalty of perjury they're attesting that the following vehicles and VINs qualify.

And then, of course, if something changes, they need to tell the government that, which is why that important website that we showed you is going to be so useful to consumers and dealers going forward, knowing that starting in January of 2024, the credit will also be able to be transferred at the point of sale of the dealership to reduce the sticker price at the point of sale. So that's going to be where things get really interesting.

But if we don't have clarity on foreign entity of concern, remember. The statute stipulates if you violate foreign entity of concern, whether it's for critical minerals or batteries as applicable, you lose eligibility as a manufacturer or a consumer to claim that credit altogether. So that's what's really riding right now on the administration in terms of clarifying that.

Because it's going to be here before we know it, and regardless of how many vehicles may qualify today or after the 18th, it could have a material impact on whether or not consumers are able to claim the credit, depending on how they define foreign entity of concern. So, Andy, I'll leave it to you on the date-of-service question.

ANDY KOBLENZ: So obviously dealers and consumers will be interested in the answers that Dave did. But going back to my characterization, that just changes is it at $7,500 or $3,750 or $0. And that's why we agree with Dave that that's crucial.

But from our perspective, the area that we need more clarification on is-- there are actually three. The first is this placed in service-- referred to as the born-on date. Right now, the credit is determined when the vehicle is placed in service, which is defined by the IRS as the possession is transferred to the consumer.

That means we don't really have a born-on date right now. What we have is a used-by date. Just like the milk you buy in the store that says use by March or April 30th, these cars are coming with a "you've got to use it"-- if you want to take advantage of this credit you've got to use it by 12/31 of this year because there will have to be a different certification based upon a different percentage content.

And that's not a particularly consumer friendly way of presenting this to the marketplace. So we are hoping that they can revisit the placed-in-service definition so that it is actually when the manufacturer finishes the car and says, OK, this car is produced. We now know it qualifies-- and it will forever qualify-- for this incentive based on its content.

If it's made in 2023, then it has to hit the whatever the percentages are-- 40% or 50%. Dave put up the chart earlier that showed those percentages. But we really need to get away from the use-by date concept and move to a born-on date. So that's one unresolved issue.

The second one is the facility of this website. Ideally, we should be able to look up on a VIN basis. If a consumer is either online or in the dealership looking at a vehicle-- and by the way, a lot of the transacting is going to go shopping. It's going to take place online.

And they get a VIN. They should be able to put it in to a single website and get that answer. The input from the consumer should be the VIN, and the output from the computer, from the website, should be $0, $3,750, or $7,500-- very simple-- so that the consumer can really inject it into its shopping decision.

The consumer still would have to go through the MAGI analysis and do they have tax liability analysis, but they would get that manufacturer piece resolved down at the VIN level. Right now it's at the make-model level, but the information is coming in from the OEMs on a VIN basis. And we hope that soon the IRS can move to a VIN tool.

The final area where we need guidance is not anything that applies now. But under the IRA, starting on January 1st, 2024, there is a provision that allows the value of the credit under 30D to be transferred, shifted, to the dealer so that the dealer can put it in the deal at the dealership. As I said earlier, one of the problems with the 30D is that you have to wait somewhere from three to 15 months to get the value of your incentive. And not everybody in the world has the cash flow that enables them to do that.

Starting in 2024, the value can be actually put in the deal and lower the monthly payment as part of the loan transaction that the consumer is using to acquire the vehicle. But that's going to require the IRS to establish a set of rules as to how-- what information is going to have to flow between the consumer, the dealer, and the IRS for that to happen and a mechanism to ensure that the dealers can be reimbursed promptly for that.

The dealer does not become the taxpayer. It's very clear under the statute. The dealer is a conduit through which the value is passed to the consumer at an earlier point in time.

If there's any issue with the appropriateness of the claiming of that by the consumer-- for example, if the consumer has a MAGI that's too high, that's between the consumer and the IRS. But the value will move earlier, and then the recapture will occur when the customer pays his taxes.

That is a set of requirements that has-- there's been no information forthcoming from the administration on. Understandably, they've been focused on this earlier application of the minerals and battery components. But we now need to turn the page and start looking at the transferability portal and the transferability rules that are necessary to make that an available mechanism as well.

KRISTIN DZICZEK: Thank you.

ANDY KOBLENZ: So those are the three big things.

KRISTIN DZICZEK: We have a couple of hopefully quick questions for you to answer. One is who's responsible for verifying the income of the purchaser? The dealer, or do the consumer takes the risk that their income is too high?

ANDY KOBLENZ: That's between the consumer and the IRS. Just as it is-- all of the claiming of the credit today is between the consumer and the IRS. And that is-- the dealers do not have the visibility into, nor candidly do we want to set up a process where the dealers are given visibility into individual consumer's tax liability and tax filing.

But the statute is very clear. It's the taxpayer for the 30D is the consumer. And the consumer needs to make sure that it's getting its MAGI calculated correctly. The IRS actually has some pretty good information up there to help consumers understand what their adjusted gross income is and where they find it, but it is the consumer's.

KRISTIN DZICZEK: So what if someone buys a car early in the year, and then they knock it out of the park at work. And they earn a big year-end bonus that gets paid out in December. Will they lose their credit they qualified for at the time they bought it?

ANDY KOBLENZ: The income requirement is either last year or this year. So if you buy your car in 2023, it's your MAGI from either 2022 or 2023. So you should be able to what your MAGI is during 2023-- your 2022 MAGI was in 2023. You have all the information necessary to calculate it.

And candidly, by this point in the year, people are filing their taxes. It's right there on one of the lines on the 1040. Or it's a slightly adjusted version of one of the lines on the 1040. So if you qualified in the prior year, you don't have to worry. You can knock it out of the park.

Now if you made way too much last year, and you say I don't think I'm going to make that much this year, so I'm going to kind of take a flyer, and then you end up knocking it out of the park with that year-end bonus, you won't qualify. But, of course, you'll have your year-end bonus to pay for that $7,500.

DAVE SCHWIETERT: And, Kristin, I think the simplest way for consumers to look at it-- you just can't fail the test both years. You can fail it the previous year or the current year, but again, there's a lot of confusion. If you try to read the statute, it takes a while to understand it. But that's basically the takeaway.

You can't fail it twice. You can fail it once and still be eligible to claim it so long as you have the tax liability as Andy said. You can't carry it forward. It's not refundable.

ANDY KOBLENZ: And just to say, Dave, that's a great way to phrase it. And if you know you passed last year, you don't have to worry about this year.

KRISTIN DZICZEK: OK. There's a couple of quick ones on 25E. You mentioned that you have to get 25E, the used vehicle credit-- you have to buy the used vehicle from a dealer. What about Tesla? Does Tesla sell their used vehicles, and are they considered a dealer?

ANDY KOBLENZ: Definition of dealer in the IRA is an entity that is licensed to sell in the state. Every state licenses sellers of vehicles. And Tesla is licensed to sell in the states in which it sells. And it has to be. I'm presuming they're complying with those laws.

And so they are not eligible for licenses in every state. But in those states where they don't have licenses, they shouldn't be selling. So it should not be a problem to get it from Tesla as well as from all the other dealers.

KRISTIN DZICZEK: And then a last one on this. Can a consumer get a 25E credit on a vehicle that had already gotten a 30D credit?

ANDY KOBLENZ: I believe that the answer to that question is yes.

KRISTIN DZICZEK: OK.

ANDY KOBLENZ: Just let me pull out 25 [INAUDIBLE].

KRISTIN DZICZEK: [LAUGHS]

ANDY KOBLENZ: I'm pretty sure that--

KRISTIN DZICZEK: I'll let you double check.

DAVE SCHWIETERT: And, Andy, while you're searching, I'll take the weight off you. My understanding is that so long as that person is different than the person that claimed it under 30D, right? Because, right, Andy? This has to be a separate transaction that's at least two years with the minimum battery requirement.

So if I was to buy a vehicle today, it wouldn't be eligible for 25E until two years later. It would have to be below $25,000. But effectively if I leased a vehicle, I can't then turn around and benefit from 25E if I remember right. Correct, Andy?

ANDY KOBLENZ: Actually, that one I'm not sure about. I actually heard some of the leasing companies suggesting that they might be able to lease it and when the consumer buys it off lease, they might be able to qualify. It's a small universe where that might happen because it has to be depreciated down to $25,000, which most of these vehicles won't be. At least not the ones in the marketplace currently.

But there's a lot of detail about 25E and all the various permutations of how it might apply in the marketplace. But I do not believe that having received a prior incentive disqualifies it from-- the vehicle may have been subject. I believe Dave is right. You can't double dip. You can't be the recipient.

But, of course, in the leasing context, it was the leasing company that was the original recipient, not the dealer. The leasing company chooses to put that into the lease. That's a private sector decision.

DAVE SCHWIETERT: Thanks for that, Andy. And another thing for Kristin. This question is a fair one. Let's keep in mind all the reporting that Andy was talking about from a consumer to a dealer, a dealer to the government, or from a manufacturer certifying the vehicle to the IRS, this is all being done to ensure that there is not any fraud as it relates to applying for or double dipping for credit.

The 30D program cannot be utilized simultaneous with the 45W, it's one or the other. But the question was certainly about 25E, the used credit, and I think Andy hit it on the head there.

KRISTIN DZICZEK: Well, and 30D is not just for purchase. It can also be leases under 30D. So I know leases are-- we talked about that as commercial credit because the leasing company would get the credit. But a consumer, when they buy or lease a vehicle, can do that under 30D, correct?

ANDY KOBLENZ: Right. That is correct. But just remembering that if it's a lease, the consumer will not be the taxpayer. And so from the consumer's perspective, it just looks like a lease incentive, which they're very familiar with in the marketplace for many, many years. We see advertisements all the time from our manufacturer friends or their captive finance companies with lease programs where they've passed along discounts through an incentivized lease. That's the way it will look to a consumer, and the consumer doesn't have to worry about any of this taxcode interface.

KRISTIN DZICZEK: So here's a question that's probably maybe more for Dave, but, Andy, I welcome your comments as well. With all of the requirements that are required for 30D-- the income, the price, the MSRP caps, the critical minerals and battery components, and entity of concern-- why would any manufacturer offer vehicles for sale under 30D when they could instead use the leasing provisions of 45W and not have to worry about where it was made or what the content is or if there was any China content in that vehicle. Leasing has none of that.

DAVE SCHWIETERT: Yeah, Kristin, my take on that is obviously whether it's a purchase or a lease, it really depends on the consumer. I mean, obviously you've clearly articulated what the congressional statute as well as the IRA attempted to do. These two provisions, whether it's 30D or 45W, purchase or lease, work in harmony.

They're attempting to increase the number of vehicles that are otherwise electrified in one way, shape, or form. And that's plug-ins, battery electric, and fuel cell hybrid. So it really ultimately comes down to the consumer. Let's keep in mind leasing-- and Andy can correct me today obviously knowing that it's changed over time. But, you know, say about 20% of all vehicles are leased. It really ultimately determines, based on a consumer, what they're looking for.

Do they want to buy the vehicle outright? Do they want to lease it and only own it-- or use it for a period of time? And then, Kristin, you're exactly right. They might realize some of those benefits easier under a lease, either 30D or 45W because they don't have to necessarily take the tax provision. They're benefiting from it as it relates to a bank or a captive.

But at the end of the day-- Andy, I'll let you maybe respond as well-- but these provisions really work in concert with one another. They're not in lieu of one. But a manufacturer would attempt to probably be eligible across the board, right? Ideally you'd want to be eligible under 30D with also the flexibility of potentially 45W. All vehicles technically qualify under 45W.

And then it's a matter of time based on the number of years and the price of the vehicle about whether or not that vehicle comes back for a 25E used lease. So, Andy, I'll turn it over to you.

ANDY KOBLENZ: Yeah. And Dave's got it right. Leasing is not for everyone, and it's a different relationship to the vehicle. And the consumer may not like that relationship. And they may want-- particularly if the vehicle qualifies for a 30D.

There's also-- there are-- it's not-- there are some issues that the finance company has to address in any lease transaction that are a little harder in this. Which is namely they have to properly estimate the residual value because the way leases operate. And while there's a lot of learning on the depreciation curves for existing vehicles, these are largely new vehicles coming into the market. And we don't how the used vehicle market is going to price these vehicles.

And to set the residuals is not easy. So one of the hesitancies that there might be under 45W is how do I properly address the residualization risk that is held by the leasing company. So that would be a reason why, if the vehicle was otherwise available under 30D, they may be promoting it through a 30D.

Would you all-- it's just a more detailed example of Dave's comment about how these two work in concert and complement each other and they supplement each other. But they don't replace each other.

DAVE SCHWIETERT: And, Kristin, another way when we're looking at these credits is remember the slides I showed in terms of current uptake of electrified vehicles-- 7%. It's going to be in a manufacturer's interest to ensure that they're as broadly eligible as possible. Because these credits are on the consumer-facing side, not to the manufacturer, but to ensure that these vehicles are being acquired or used, which then obviously helps the manufacturer as it relates to their obligations.

And that's why I thought it was really important to highlight some of those regulations, whether it's California, the yet-to-be-released GHG rules from the Biden administration next week, and what that ultimately means for consumers in terms of these vehicles. So manufacturers are striving under the law to ensure that they meet as many of the provisions as possible, knowing that some of them can't be changed administratively, knowing that obviously Congress and IRA requires North American assembly as a prerequisite.

So that's why you had a precipitous drop in how many 30D-eligible vehicles there were. But going forward, there's going to be challenges related to all these content provisions. But thankfully, 30D works in concert with 45W to ensure that ultimately the consumer has options as it relates to being able to acquire or at least the vehicle of their choosing.

KRISTIN DZICZEK: That's a really good segue into a question we've gotten in several different ways. These manufacturing production credits and the investment incentives are extensive. But those content thresholds for battery components and critical minerals ramp up very quickly. Are automakers pivoting their production process to have more of their vehicles eligible for IRA? And for tier-one suppliers providing subassemblies to the OEMs, what is the impact of the legislation? And the question is how do they best capitalize?

ANDY KOBLENZ: Yeah. I'll take a stab at it. So, Kristin, you're correct. I mean, obviously manufacturers are trying to ensure that whether it's 30D or other provisions, they're able to maximize what that means for their particular business line and manufacturing. But, yeah. Obviously the provisions I focused on, whether it's 45X for the production tax credit, those provisions under the code, which IRS still hasn't given full guidance on, but, for instance, I'm going to talk about battery or cell manufacturing.

That $30 kilowatt hour credit is so important-- $35. Excuse me. It's so important because that's given once it can be claimed for the kilowatt hours of cell production or module production, that a taxpayer would claim. So that's good to localize production, which obviously helps as it relates to overreliance or dependence elsewhere around the world. So many fact--

KRISTIN DZICZEK: But then that's an ongoing credit. It's a production credit.

DAVE SCHWIETERT: Yeah.

KRISTIN DZICZEK: So year after year that will be available.

DAVE SCHWIETERT: That's right, Kristin. So these IRA provisions, particularly on the 45X, these are 10-year provisions that wind down after seven, at least on the production side. So that's why you're seeing a lot of announcements.

Manufacturers were already making significant investments and announcements. And I think IRA has helped to speed up some of those announcements. Because you can't claim that credit until such time as you're actually producing those cells or modules or the qualifying provision. But keep in mind, 45X is designed for production or assembly of something that otherwise isn't generally occurring in the US.

So that's important. It does not come with the content requirements that otherwise we talked about for the 30D program. So again, they're serving to try to bolster the broader supply chain. It's true industrial policy as it relates to not being as dependent on certain regions or countries as we may be today for a number of reasons.

So again, that's my quick answer, Kristin. But yes. Manufacturers are taking notice of those requirements, knowing that some of them, either because of price or North American assembly, just might not be in the realm of possible for a particular make or model at the moment. But that doesn't mean that they might not be eligible in the future, depending on future product plans and manufacturing.

But again, that's up to individual companies to figure out. But those take years. You don't just decide overnight that you're going to start next year producing something and delivering it to a consumer.

KRISTIN DZICZEK: Great. Thank you. One little quick question here. Maybe it's quick. Can you talk about how place of assembly is defined? The guidance last week refers to a plant where a manufacturer affixes the VIN. How does that work in real life and particularly for imported vehicles? What if a vehicle is imported as a knock-down kit and is then put together in the US and the VIN is assigned here?

DAVE SCHWIETERT: I might defer on knock-down kit. So let me back up first to explain under 30D as well as the other provisions of the IRA, Treasury has required manufacturers-- if you go to the IRS website-- to assert that they are a qualified manufacturer, and they meet a host of requirements-- some of which you and Andy talked about, whether it's a clean air compliant vehicle that is being used for certain purposes, whether it's on-street or mobile machinery, those type of things.

So one, you have to be a qualified manufacturer. Two, when it comes to the North American assembly, the way that it's being implemented under statute is basically based on the VIN. So if a manufacturer is attesting, under penalty of perjury, that vehicle was so produced, but it was imported, that could raise some concerns. So I'm not going to get into a specific on a kit.

But obviously that's what's raised some concerns of some of our members. Because once on August 16th of last year, when the IRA was signed into law, overnight-- not like three months out or six months out and people could plan-- overnight, upon signature, vehicles that were eligible the previous day were no longer eligible because of the North American assembly requirement.

So if you had vehicles that were inbound to the US for sale but produced overseas and the VIN designated as such, those vehicles are no longer eligible for up to the $7,500. So does that mean they'll forever be ineligible? No. But it certainly shrunk the universe of vehicles that would otherwise qualify under 30D.

KRISTIN DZICZEK: Great. Well, we are at our end. And this was a fast hour and 15 minutes, I believe. And I want to thank Dave Schwietert from AAI and Andy Koblenz from NADA for giving us a whole lot of information in a short period of time. We at the Chicago Fed are going to continue to follow these developments on these and other issues related to this shift to producing clean vehicles in North America and other issues around the auto industry. So please keep an eye on our website and on emails from the Chicago Fed for future events and publications on our site. So thank you all for joining, and thank you to our presenters again.

ANDY KOBLENZ: Thank you very much.

DAVE SCHWIETERT: Thank you.

ANDY KOBLENZ: Bye, bye.