The Terrible Timing of Tesla’s Expiring $7,500 Tax Credit
Just a few weeks after finally reaching its goal of building 5,000 Model 3 sedans in a week, Tesla has hit another threshold: Earlier this month, it sold its 200,000th car in the US. This milestone, however, is more cause for concern than celebration: From here on out, Elon Musk’s customers will start to lose access to the $7,500 federal tax credit that softens the blow of buying an expensive electric.
The tax credit scheme dates to the 2008 Energy Improvement and Extension Act, which boosted the budding electric car industry by artificially closing the price gap between EVs and cheaper gasoline-powered cars. The credit was allocated for the first 200,000 cars any given manufacturer sells, after which, the thinking went, it shouldn’t need so much federal help.
After a carmaker hits the magic number, the credit phases out: It’s available in full for the rest of that quarter and the following quarter, then it halves to $3,750 for six months, then halves again to $1,875 for another six months. Then it disappears. That likely explains why Tesla upped deliveries to Canadian customers in June. Pushing the 200,000th US sale to July, the first month of the third quarter of the year, means three more months of selling cars with the full $7,500 back.
Still, that only delays the inevitable: Today the company published an update on incentives on its website, showing the full credit will be available until December. By 2020, Tesla customers won’t be able to count on any financial help from the feds. History suggests the extra money makes a real difference: When the state of Georgia axed a $5,000 credit in July 2015, sales of EVs fell by 90 percent.
The timing’s no good for Tesla, which is ramping up production of the Model 3, its long-anticipated affordable offering. Those first 200,000 cars were nearly all luxury Model S sedans and Model X SUVs, going to owners for whom a tax credit is more nice than necessary. Even the Model 3s now coming off the line are the pricier variants of the car, costing between $49,000 and $76,500. Buyers holding out for the long-promised $35,000 model (with less range and moderate performance specs) will have to wait another six to nine months and will get $3,750 back from the feds, at best. And for a car company that’s eager to reach more buyers with more affordable cars—and is facing ever more competition—that hurts.
Tesla isn’t the only automaker dealing with this problem. Nissan and General Motors are likely to hit the limit soon. And while electric cars aren’t as core to their businesses as they are to Tesla’s, they’re not thrilled. “We feel tax credits should be expanded so our customers continue to receive the benefit going forward,” GM CEO Mary Barra said in a speech in March. Congressman Peter Welch (D-Vermont) agrees. He has introduced a bill to remove the cap and let the credit run for 10 years.
The bill may seem to have little chance of passing under an administration that’s working to roll back gas mileage standards, but there is a business case that might persuade President Trump. GM and Tesla—American car companies—are effectively being penalized for building innovative new vehicles first. Now European companies are entering a more mature market, with the Jaguar I-Pace, Audi e-tron, and Porsche Taycan, whose buyers will still qualify for the full tax credit.
Other countries are still continuing a push to phase out the internal combustion engine (the UK just released more details on its plan for a ban by 2040 this week,) so the EV industry isn’t likely to shrivel up and die because a US credit goes away. And battery costs are steadily dropping, so the technology won’t be more expensive forever.
But carmakers might also rethink how they market their vehicles. Electric cars can be fast and fun, and they can get you carpool lane access or free parking in some cities. Some states have additional rebates and credits to encourage driving on batteries: Colorado for example offers a $5,000 credit. Emphasizing those, while also working to push down the cost of batteries, could help put EVs on an equal footing with internal combustion engine cars, which after all, was the point of the credit in the first place.