Killing The IRA's Tax Credit Is a Big Win For China

The IRA's $7,500 is designed to incentivize U.S. EV supply chain investment. Without it, it's not clear if our EV supply chain will get off the ground.

• US President-Elect Donald Trump has reportedly expressed a desire to kill the IRA's $7,500 plug-in vehicle tax credit.
• The Inflation Reduction Act has incentivized companies to invest in a North American-based EV supply chain.
• Tesla supports removing the EV tax credit.

The incoming Trump Administration has been remarkably inconsistent on, well, practically everything, but the purview of our website has us focusing on how it will affect EVs. And well, things aren’t looking all that great. A new report from Reuters has proto-confirmed something we all felt coming: the EV tax credit is on the chopping block in the incoming Trump administration.

Some may say that this is great news, insisting that it’s now come time for EVs to stand on their own and be subject to market forces without government subsidies artificially inducing demand. Even automakers like Tesla have reportedly pushed to eradicate the IRA’s tax credits. But, is this really the right move? If we think about it, removing the IRA’s credit won’t just be devastating to EV sales, but it’s tacitly handing a win to China.

For most Americans, I would wager that the IRA’s $7,500 tax credit is more seen as a nice discount that could be applied to the purchase of a new car. However, it’s easy to forget that the $7,500 tax credit is dependent on manufacturers divesting from China and investing in North American-based supply chains. Remember, much of a vehicle’s tax credit eligibility is based on its battery. Initially, at least 50% of a plug-in vehicle's critical materials must be sourced from North America or another country deemed a friendly trade partner. This percentage was to increase by 10% each year until it eventually hit 100%.

For the most part, it was working. Automakers and battery manufacturers came together to invest in North American battery processing and production. Companies like LG, SKon and even Chinese battery giant CATL are in the midst of implementing plans to increase investment in the United States via manufacturing plants. Likewise, U.S. market EVs were developed to take full advantage of those parts rather than rely on imported battery parts from China. This idea was a vision of the future that the Biden administration saw, where the US leads the electric vehicle push with well-connected cars that are made here.

But without an IRA’s tax credits to incentivize cars that are made here with our own budding supply chain, all that development is called into question. Will manufacturers continue to invest in our supply chain, or will they just pivot back to China? Or, if the new Trump Administration has its way and implements severe tariffs on any imported goods and decimates any purchase incentives for EVs, will there even be an EV market in the United States?

This isn’t me catastrophizing a so-far theoretical situation; U.S. Energy Secretary Jennifer Granholm told reporters that killing the EV tax credit would be “counterproductive” and that removing the credit would “end up ceding the territory to other countries, particularly China.”

Of course, it’s not entirely clear if the IRA can be rolled back as glibly as Trump says on social media. But, the idea that it’s on the chopping block certainly has given more than a few manufacturers anxiety.

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