Should Tesla Worry As Its $7,500 Federal Tax Credit Winds Down?

The $7,500 tax credit for the adoption of electric vehicles could begin to wind down for prospective Tesla customers, as the company is likely close to delivering its 200,000th electric car in the U.S market. The winding down of the subsidies could effectively increase the price of Tesla (NYSE:TSLA) vehicles for customers, putting the company at somewhat of a disadvantage, given that other manufacturers who are just getting started in the EV space will still have access to these credits. Below, we take a look at how the scaling down of the subsidies could impact Tesla.

We have also created an interactive dashboard analysis outlining how Tesla’s revenues, operating profits and free cash flows could trend over the coming quarters.

The Federal Tax Credit Is A Key Incentive For EV Buyers

The federal government offers buyers of electric cars a $7,500 tax credit, provided that the EV manufacturer has sold less than a cumulative 200k electric vehicles in the U.S. After the 200k milestone is reached, the full tax credit continues for one calendar quarter and the subsidy is reduced to $3,750 for the six months after that. The credit declines to $1,875 for the next six months and then finally stops. Tesla is likely to have reached this milestone in June (or will potentially reach it early this quarter), indicating that the phase-out process for federal tax credits could begin soon for the company. While there is a new bill introduced in Congress that seeks to remove this 200k threshold, the outcome remains unclear, and it’s unlikely that it will help Tesla in the near term.

How Tesla Could Be Impacted 

While mass-market automakers GM and Nissan have been selling relatively compelling electric products such as the Bolt and Leaf for some time now, the luxury EV market is also heating up, with Jaguar getting ready to launch it’s well-reviewed I-Pace SUV (starting at $69,500) and German auto giants also prepping for the launch of new luxury EVs. While Tesla is a premium brand, with its customer’s likely being less price-sensitive, it could nevertheless face some disadvantages as customers of EVs from newer players would still have access to these tax credits. For instance, after the federal tax credit, the I-Pace would effectively start at $62,000 versus the Model X, which would cost $79,500 without tax credits.

That said, Tesla probably doesn’t need to worry too much. Interest in Tesla vehicles appears to be relatively strong, with the Model 3 holding paid reservations from 420k potential customers at the end of Q2. Having an early start in the EV space could also help Tesla move down the cost curve more quickly than its newer rivals. For instance, the production process of the Model 3 uses a significant amount of automation, which could drive down costs significantly over the long term. Tesla is also aiming for battery cell costs of under $100/kWh per year, which is likely well below the broader industry (related: Reviewing Tesla’s Competitive Advantages As Jaguar Launches Well-Reviewed I-Pace).

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