The federal EV tax credit is, to put it lightly, in limbo given the current wording of the GOP’s “big, beautiful bill.”
Though a lot of back-and-forth remains, with the Senate haggling with the House — and senators from red states with EV factories loath to damage the industry — it is more likely than not that GOP holdouts will fall in line and gut former President Biden’s $7,500 tax credit for EV purchases and leases.
The big question is how important the tax credit is to Tesla and CEO Elon Musk? Could it be that his recent outbursts against the Trump-backed budget bill are frustration over the loss of the tax credit?
A new report from Bloomberg suggests that Musk’s new tack to destroy the bill comes after his lobbying to save the tax credits was unsuccessful. Musk responded that the budget bill negates all the cost savings supposedly achieved by the DOGE “at great personal cost and risk,” alluding to the hit to Tesla’s business.
But if you listened to Musk in the past, you would think the EV tax credit is not a big deal for Tesla EV sales vis-à-vis its competitors.
“I think it would be devastating for our competitors and for Tesla slightly,” Musk said when asked about the future of the tax credits during Tesla’s Q2 earnings call last year. “But long term probably actually helps Tesla, would be my guess.”
Tesla likely would not exist if not for that tax credit, which the company availed itself to for years during the Obama administration. The EV tax credit was extended and enhanced under President Biden’s Inflation Reduction Act, signed in 2022.
Tesla can profitably produce its EVs, so at the time, Musk seemed fine with Congress potentially pulling the EV tax credit benefit.
But Musk has been changing his tune. In addition to his tirade trashing the GOP bill as a “disgusting abomination” and the Bloomberg report on Musk’s lobbying to save the credit, he complained in a recent post about the bill’s favorable tax treatment for carbon-based energy, but not clean electric.
“There is no change to tax incentives for oil & gas, just EV/solar,” Musk wrote about the budget bill.
The name of the game: Affordability
Musk has said in the past that Tesla was not demand-constrained but supply-constrained — meaning Tesla sales were mostly hindered by the vehicles’ high cost — and the need for cheaper pricing. Hence, the other big factor when it comes to affordability: vehicle leases and the EV tax credit.
While income restrictions can limit the $7,500 tax credit for purchases, leased vehicles can avail themselves of the full credit without income-level limits. Credit firm Experian reports that 50% of all EVs are leased in the US, but Tesla’s lease percentage could be higher. In the fourth quarter of last year, the Model 3 (12.2% of all leased EVs) and Model Y (9.1%) were the top leased EVs in the country.
Those are significant numbers, and a $7,500 reduction in “capital cost” (the lease amount financed) can considerably reduce lease payments. On the flipside, adding that amount back has the opposite effect.
“Electric vehicle shoppers are price conscious. We’ve seen some impact on price fluctuations over the last couple of years,” Brent Gruber, executive director of J.D. Power’s EV practice, said to Yahoo Finance. “So if those tax credits go away, you’re going to see probably a slowdown in the level of interest for electric vehicles.”
Read more: How to avoid the sticker shock on Tesla car insurance
For Tesla in particular, J.D. Power and Gruber predict that losing the tax credit will be keenly felt.
“I can tell you from a data perspective and what we see at J.D. Power, I think that Tesla is very susceptible to the elimination of the tax credits, just as other manufacturers are as well,” Gruber said. “One of the things that we do with our study is we track the influence of those tax credits on purchase decisions, and when you look at the brands that are most affected by those purchase prices and that tax credit, Tesla is right up there at the top.”
This could be why Musk is perhaps changing his tune on the importance of the tax credit, and it may explain some of his complaints regarding the GOP tax bill.
BofA’s John Murphy believes the loss of the tax credit may be mixed for Tesla, but the big issue is the lack of a cheaper EV, a vehicle Tesla says is coming but hasn’t been seen.
Tesla will need those cheaper EVs if it loses EV tax credits to reach price-conscious buyers.
“I think [Musk’s] going to be challenged to grow volume unless he gets this low-cost EV launched,” Murphy said during BofA’s annual “Car Wars” presentation on Wednesday. Murphy added that Tesla not launching a cheap EV this year would be a “huge disappointment.”
Perhaps losing the tax credit may force Musk’s hand — and release the cheap EV he apparently didn’t want.
After all, it wouldn’t be the first time Musk changed his tune on something.
Pras Subramanian is a reporter for Yahoo Finance. You can follow him on X and on Instagram.
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