In this exclusive op-ed for The Manufacturer, Avalara’s Scott Peterson explores why, against a backdrop of new tax rules, proposed policy changes, and tariffs on Canadian and Mexican imports, manufacturers that stay agile will be best positioned for success.
The speed of the U.S. electric vehicle (EV) industry is accelerating, with forecasts estimating a production capacity of 5.8 million new EVs annually by 2027. Spurred by tax incentives from the Inflation Reduction Act and the Infrastructure Investment and Jobs Act, investors have committed over $312bn to American EV and battery production. Incentives are designed to bring jobs and production to the U.S., reduce reliance on foreign supply chains, and accelerate consumer and commercial adoption.
While the full effects of these incentives are still unfolding, 2025 may bring regulatory uncertainty that could disrupt supply chains and pricing. Stricter battery sourcing requirements, proposed legislation that could eliminate EV tax credits, and new tariffs on imports from China and Mexico all have the potential impact of increasing manufacturing costs.
Policy uncertainty and tax complexity is keeping manufacturers on their toes, making long-term investment and compliance planning increasingly complex. Regulatory rollercoasters are no exception, forcing manufacturers to rethink everything: from where they source materials to how they structure supply chains and navigate tax exposure in the evolving EV landscape.
The 2025 regulatory shift: What’s changing for EV tax credits?
For years, tax incentives have been the not-so-secret sauce behind the EV boom, sweetening the deal for consumers and manufacturers alike. For instance, the Clean Vehicle Credit dangles up to $7,500 per EV, but only for those that meet strict domestic manufacturing and sourcing rules. As of January 1, 2024, that means no battery components from a “foreign entity of concern” (FEOC), a designation that includes China, Russia, Iran, and North Korea.
But even more changes are coming in 2025. As of January 1, 2025, automakers are now prevented from using critical minerals—lithium, nickel, cobalt, and graphite—if extracted, processed, or recycled by an FEOC. With China in control of the production of the majority of these minerals, compliance is shaping up to be a high-stakes game of supply chain gymnastics.
The problem? Most automakers don’t have complete visibility into their mineral supply chains, let alone the agility or ability to overhaul them overnight. Many have spent years forging cost-efficient partnerships with Chinese suppliers, and shifting away from them isn’t as simple as flipping a switch. Some companies are pouring money into U.S.-based battery production, domestic mining, and refining, but they are not yet at scale. That leaves manufacturers in a tough spot: either fast-track a costly supply chain revamp or risk losing the federal tax credits that help keep EVs competitive.
The ELITE Vehicles Act: A push to end EV tax credits
Some lawmakers are considering eliminating tax credits altogether as if the 2025 sourcing requirements weren’t already reshaping the EV landscape.
In May 2024, Senator John Barrasso (R-WY) introduced the Eliminating Lavish Incentives to Electric (ELITE) Vehicles Act, a bill that would:
- End the Clean Vehicle Credit for new and used EV purchases
- Eliminate federal tax credits for EV charging stations
- Close the so-called “leasing loophole” that allows some foreign automakers to qualify for incentives
Supporters of the bill argue that EV tax credits mostly benefit higher-income buyers, and that the government shouldn’t be picking winners in the auto market. Opponents counter that cutting these incentives could slow EV adoption, making it harder to meet climate goals and keep up with consumer demand.
From a tax policy perspective, eliminating these credits forces automakers to rethink pricing strategies. Many EVs are currently priced with tax incentives in mind, keeping them competitive with gas-powered models. Without those credits, manufacturers may need to adjust sticker prices, introduce new financing structures, or find other ways to maintain and grow sales momentum.
Tariffs on Canadian and Mexican EV imports: A pricey new roadblock
As manufacturers prepare for stricter sourcing rules and potential tax credit rollbacks, another financial hit is on the horizon (or maybe not?)
In November 2024, President Trump announced his plans to place 25% tariffs on all imports from Canada and Mexico—plus a 10% tariff on all goods from China. In February, Trump put these plans into an executive order set to go in effect on March 4, 2025. And just one day after the planned enactment, the White House ordered a one-month delay on auto tariffs as requested from the “Big 3” U.S. automakers; Ford, General Motors, and Stellantis.
As our neighbors, Canada and Mexico are both linchpins in North American EV production. And under the United States-Mexico-Canada Agreement (USMCA), automakers have built integrated supply chains, often sourcing raw materials from Canada and assembling components in Mexico. Roughly 50% of imports from Mexico and 38% of goods from Canada comply with USMCA, with motor vehicles and automotive accessories making up a good portion of USCMA-compliant trade. The open question of the future of tariffs threatens to shift this balance, forcing companies to weigh the financial viability of cross-border manufacturing.
Should these tariffs eventually go into effect, the impact on automakers who rely on Canadian and Mexican-made batteries and EV components could be significant. Some manufacturers may absorb the added costs, while others may adjust pricing, potentially making EVs more expensive for consumers.
Meanwhile, Canada, Mexico, and China have all indicated their willingness to respond to the U.S. with retaliatory tariffs, further complicating trade dynamics and adding new tax hurdles for these markets. On March 4, China responded to new U.S. tariffs by imposing additional tariffs of up to 15% on imports of key farming products. Canadian Prime Minister Justin Trudeau confirmed that Canada would impose a retaliatory tariff on more than $100bn of American goods regardless of if U.S. tariffs were to hold. Newly elected Canadian prime minister-designate Mark Carney confirmed in an X post that Canada will double down. Mexican president Claudia Sheinbaum also alluded that the country would respond with retaliatory tariffs though the amounts and goods affected remain unclear.
The escalating tensions leave businesses and policymakers bracing for impact, as the back-and-forth of tariffs fuels a high-stakes game of economic brinkmanship–one that shows few signs of resolution anytime soon.
How automakers are responding
With all the tax changes, new sourcing rules, and rising trade costs, automakers are making some big moves to keep up. One primary strategy is bringing battery production back to the U.S. Companies are quickly setting up battery plants here to take advantage of domestic incentives. However, getting these plants up and running won’t happen overnight, making it challenging to meet the 2025 sourcing rules. Some manufacturers are also looking into different battery types, like lithium-iron-phosphate (LFP) batteries, which need fewer restricted minerals and are already popular in China.
Automakers are rethinking their pricing strategies with the chance of losing tax credits and dealing with higher tariffs. They’re adjusting MSRPs, revamping leasing models, and changing financing options to keep electric vehicles affordable for everyone. As federal support for EVs starts to fade, many companies are teaming up with state governments to snag new tax incentives. It’s a smart, multipronged approach to stay competitive and keep growing in this changing market.
The road ahead: Compliance, costs, and the future of EV manufacturing
With new tax rules, proposed policy changes, and tariffs on Canadian and Mexican imports, 2025 will be a defining year for the U.S. EV manufacturing industry. Automakers are navigating a rapidly shifting landscape—supply chains are being restructured, tax incentives are in flux, and trade costs are climbing.
While the policy outlook remains uncertain, one thing is clear: manufacturers that stay agile will be best positioned for success. Whether that means reshoring production, forming new international partnerships, or rethinking pricing strategies, companies that plan ahead rather than react will have the advantage.
About the author
Scott Peterson, Vice President of U.S. Tax Policy and Government Relations at Avalara.
Scott leads Avalara’s effort to be the first name in sales tax automation. Prior to joining Avalara Scott was the first Executive Director of the Streamlined Sales Tax Governing Board. For seven years Scott acted as the chief operating officer of an organization devoted to making sales tax simpler and more uniform for the benefit of business. Before joining Streamline Scott spent ten years as the Director of the South Dakota Sales Tax Division where he was responsible for the state sales and use tax, the state’s contractor’s excise tax, the sales and use tax for over two hundred cities, and the sales and use tax for four tribal governments.
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