Prospects for fixing the Inflation Reduction Act

By Troy Stangarone

Since its passage in August, the Inflation Reduction Act (IRA) has been a significant source of tension between the United States and Korea. While designed to reduce U.S. emissions of greenhouse gases by nearly 40 percent by 2030, the tools the Act uses to promote the domestic sale of electric vehicles (EVs) to achieve those objectives have caused concern in Korea and among other U.S. trading partners.

Chief among these concerns are provisions in the Inflation Reduction Act that require EVs to be assembled in the United States, Canada or Mexico for U.S. buyers to be eligible for a $7,500 tax credit. Without production facilities in North America for electric vehicles, Hyundai and Kia currently produce EVs in Korea for export to the U.S. market. These vehicles are no longer eligible for the consumer tax credit for EVs.

There have recently been some positive developments in addressing the tax credit issue for foreign-built EVs in the United States, but also clear indications that achieving more significant adjustments to the Inflation Reduction Act's EV provisions will be difficult.

In late December, the Treasury Department released its initial guidance proposals for implementing the EV provisions of the IRA. As part of those initial proposals, the Treasury Department signaled its intent to accept requests from the Korean government, industry and other U.S. partners that imported EVs sold to leasing companies be eligible for the tax credit under the commercial vehicle provisions of the Act.

The suggested guidance does not fully resolve the tax credit eligibility of Korean EVs in the U.S. market, but it does provide an avenue to continue to export tax credit-eligible EVs from Korea until Hyundai and Kia's joint EV production facility opens in 2025.

While that decision is helpful to Korean and European producers of EVs, without Congressional support, more significant changes are unlikely, and even this limited progress could potentially be reversed. Congress holds the power of taxation and as U.S. Treasury Secretary Janet Yellen noted early on, the administration has little scope to make adjustments to the detailed language on many of the EV-related provisions.

The Treasury's guidance on commercial vehicles was also immediately criticized. Senator Joe Manchin, the Inflation Reduction Act's chief author, took the Treasury to task for undermining policies to "bring our energy and manufacturing supply chains onshore to protect our national security, reduce our dependence on foreign adversaries and create jobs right here in the United States."

Senator Manchin has indicated that he intends to introduce legislation that would prohibit the Treasury's suggested interpretation of the commercial vehicle provisions because it would undermine the broad intent of the legislation.

The best chance for Congress to have made changes to the Inflation Reduction Act, however, was the omnibus spending bill passed just before Christmas to fund the federal government, which included side provisions such as reform to the Electoral Count Act of 1887 and a ban on the use of TikTok on U.S. government phones. Standalone legislation to make changes to the IRA is unlikely to be considered by Congress.

With the Republican victory in the U.S. House of Representatives in the November elections, the divide in U.S. politics will also be an issue. Republicans did not support the initial IRA legislation, but seem unlikely to amend it because they place a higher priority on issues such as removing the additional funding provided to the Internal Revenue Service in the legislation than on addressing its other provisions. The dysfunction that took place in electing a new House speaker also suggests that the passage of changes, which address Korean concerns on the Inflation Reduction Act, but that do not remove the benefits that will flow to Korean firms from the legislation, will be increasingly difficult to achieve.

There are real benefits to the Inflation Reduction Act for Korea. While there has been much focus on the challenges that Hyundai and Kia face from the assembly provisions, the Korean EV battery industry stands to be one of the biggest winners from the legislation. Under the legislation, the U.S.' global share of EV batteries is expected to grow from 3 percent to 44 percent by 2025 according to Yuanta Securities. Korean firms are expected to see their share of the U.S. EV battery market grow from 26.5 percent to 69 percent over the same time period. They would also likely see the costs of their investments in the United States reduced almost by half thanks to U.S. IRA subsidies.

As President Joe Biden noted during French President Emmanuel Macron's recent state visit, there are "glitches" in the Inflation Reduction Act. While his administration is looking for ways to deal with those issues, Congressional intervention will be needed if there are to be significant changes. Unfortunately, that seems unlikely to happen.

Troy Stangarone (ts@keia.org) is the senior director of congressional affairs and trade at the Korea Economic Institute.