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Putting Brakes on the EV Fast Car

Posted on Feb. 19, 2024

When Congress doesn’t hold hearings on tax statutes before enacting them, lawmakers will be inclined to hold them afterward, and the proceedings are likely to be unproductive affairs tinged with rancor. This backwards legislative process has been simmering behind the scenes of the IRS and Treasury’s work to implement the Inflation Reduction Act’s energy tax credits. For years when writing preambles to final regs, the agencies have had to manage displeased taxpayers; now their job also routinely includes damage mitigation in post-enactment congressional hearings with rankled senators. As the January 11 Senate Energy and Natural Resources Committee hearing demonstrated, the credits for electric vehicles (REG-120080-22) are a source of special irritation for many of them.

Treasury issued a more optimistic assessment of the implementation process in late January, saying it’s now in “phase three.” Phase three, not surprisingly, mostly means finalizing the proposed regulations. The previous two stages in implementation evidently weren’t delineated by the information-gathering notices in fall 2022 and the steady flow of guidance and proposed regulations over the past year or so. Rather, they were dedicated to “the core elements needed to accelerate significant economic and climate benefits of the law” and “boosting American manufacturing,” according to Treasury Assistant Secretary for Tax Policy Lily Batchelder. Batchelder included the EV credits in the category of core elements of the law, and then tellingly characterized them as “high-profile.” The prevailing wage and apprenticeship rules and domestic content bonus credits are “novel” and “cross-cutting,” she said. But the EV credits have the distracting quality of having captured Congress’s attention.

The cost of the EV credits is one point of contention. The Congressional Budget Office estimated in August 2022 that the total, 10-year cost of the changes to section 30D would be $7.5 billion, while the Joint Committee on Taxation’s December 2023 estimate of the clean vehicle credit’s cost between 2023 and 2027 was $19 billion. Senate Finance Committee member John Barrasso, R-Wyo., pointed out at the Energy Committee hearing that Goldman Sachs has estimated that the EV subsidies in the IRA will cost $393 billion.

Treasury Deputy Secretary Adewale O. Adeyemo defended the proposed rules at the hearing. “What we’ve seen in our conversations with automakers is that they feel as if the standards set in the IRA in terms of clean vehicles and the 30D standards are tough,” he said. He added that the introduction of the foreign entity of concern rule resulted in the number of eligible cars being reduced from over 40 to only 13. “What the automakers have also said is they are achievable standards that we can use to make sure that they’re domesticating the supply chain,” Adeyemo said.

Starting From Zero, Nothing to Lose

It was Deputy Energy Secretary David Turk’s job to provide projections for what the IRA and other Energy Department programs should achieve. Graphite constitutes a significant part of individual EV battery cells, but the United States does little of the processing domestically — that market is completely dominated by China, Turk said at the hearing. He added that between the IRA and the grant and loan programs that the DOE administers, the department projects that 16 percent of the graphite in passenger vehicles will be processed in the United States by 2027. He said China also processes 65 percent of the world’s lithium and cobalt, but that U.S. lithium production is expected to increase 13-fold by 2030. Turk touted the $157 billion in private investments he said has been made in the U.S. supply chain for EVs so far.

Maybe We Make a Deal

West Virginia Democratic Sen. Joe Manchin III evidently hasn’t ruled out a run for president. That partly explains the drama at the hearing, which was mostly — and awkwardly, given the committee’s area of jurisdiction and limited bench of taxwriters — about the proposed regulations. Manchin is almost as good at senatorial theatrics as Jimmy Stewart. As his aide hoisted charts showing the effect of the proposed regulation’s 50 percent value added test, Manchin told Turk that the regs “basically defied the law.” He asked, “Are you trying to accelerate because you think we can’t do it [onshore the supply chains] quick enough?” Turk responded that the objective was to increase the percentages of minerals processed or extracted in the United States and free trade agreement countries, or recycled in North America, as quickly as possible.

Manchin’s complaint is that the advent of the 50 percent of value added test in prop. reg. section 1.30D-3(c)(17) halves the applicable percentages that he and Senate Majority Leader Charles E. Schumer, D-N.Y., wrote into the IRA at section 30D(e)(1)(B). And he’s right, at least in the short term. Depending on what Treasury and the IRS eventually decide, his chart might overstate things beyond 2024.

The preamble to the proposed rules explained that the 50 percent of value added test is meant to apply for 2023 and 2024. “For later years, however, the Treasury Department and the IRS anticipate moving to a more stringent test,” it said. The preamble mused that one approach might be to increase the 50 percent requirement incrementally. The “more stringent test” will likely feature “more detailed tracking throughout manufacturer’s supply chains,” to comply with the foreign entity of concern rules that apply to vehicles placed in service after December 31, 2024. The proposed version of those rules was released in December 2023 with the tracking requirements (REG-118492-23).

Manchin wrote to the Government Accountability Office in December 2023 to register his displeasure with the proposed regulations. “In drafting section 13401 of the Inflation Reduction Act, Congress left little to the Treasury Department’s imagination or its discretion,” he wrote. Manchin charged that the proposed regulations don’t carry out the purposes of section 30D as adopted by Congress. “They pursue, instead, the Administration’s own unenacted policy preferences,” he told the GAO.

Manchin is likely to make some mistakes when he wades into tax waters because until the IRA, he was not a regular author of tax bills. And he did make a misstep — he seemed to think it was unusual to allow taxpayers to rely on proposed regulations, giving Adeyemo the chance to correct him about standard procedures. Adeyemo observed that “stakeholders” like Manchin could submit comments and that Treasury would consider them. Even senators other than Manchin might bristle at the suggestion that they are mere stakeholders in implementing the laws they passed. It may be that the lesson Congress learns is that the delegation of authority to Treasury and the IRS should be more constrained and specific.

Manchin’s other gripe is the perennial problem of unilateral delays of effective dates and deadlines in tax guidance, which in this case takes the form of a transition rule that wasn’t in the statute. Section 30D(d)(7) excludes any vehicle placed in service after December 31, 2024, if any of the applicable critical minerals in its battery were extracted, processed, or recycled by a foreign entity of concern, and any vehicle placed in service after December 31, 2023, if the components in its battery were manufactured or assembled by a foreign entity of concern. Manchin noted to the GAO, and again at the January 11 hearing, that the proposed rules delay those prohibitions from 2024 to 2026 and from 2023 to 2025, respectively. The effect, he wrote, is that EVs containing critical minerals or battery components from foreign entities of concern placed in service over the next three years can qualify for the credit.

The transition rule in the proposed excluded entity rules preamble comes with strings attached. “To use this transition rule, qualified manufacturers must submit a report during the up-front review process,” the preamble explains. That review process requires manufacturers to provide specified attestations, certifications, and documentation for review by the IRS and DOE that show compliance with section 30D’s requirements, but the review process starts in 2025. The transition rule also allows vehicle manufacturers to exclude low-value and hard-to-trace battery materials from the foreign entity of concern analysis through 2026. Manchin’s letter to the GAO lamented that the “proposals breach the guardrails that Congress erected in section 30D to promote the production of critical minerals and battery components in this country.”

A Plan to Get Us Out of Here?

Manchin’s angry, but he’s on solid ground in demanding that guidance stick to the text of the statute. The rules may be essentially invulnerable to challenge because they don’t immediately inconvenience anyone they affect, but Treasury and the IRS are still constrained by the statutory language. If Congress didn’t write transition rules or delegate authority to do so, the guidance shouldn’t add them, however reasonable and necessary they may be in making the statute work. Congress should be taken at its word, whether that results in blowing up the budget score or failing to carry out the legislative intent because no one immediately qualifies for the tax benefit.

Manchin’s proposal to the GAO that the proposed regulations be subject to the Congressional Review Act probably won’t meet with a favorable response because the act applies only to final rules. His suggestion at the hearing — that once the amount of credits given out hits the original estimates, they be stopped or scaled back and Congress must reconsider the program — has more merit, but it is incumbent upon Congress to write the law that way. “Our intention was to stay within the CBO score in how we paid for it, so it would not add to our deficit,” Manchin said. Unfortunately, that intent appears nowhere in section 30D. Congress has capped the clean vehicle credit at a certain number of vehicles in the past, but the IRA’s changes to section 30D didn’t limit the amount of credits available.

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