- The federal government gives people who buy electric vehicles a tax credit between $2,500 and $7,500, but two calendar quarters after a company sells its 200,000th electric vehicle in the US, the tax credit begins to phase out.
- The loss of the tax credit will hurt demand for Tesla’s Model 3, which was designed to appeal to consumers who can’t afford the company’s Model S sedan and Model X SUV.
Tesla expects to deliver its 200,000th vehicle in the US this year, which means the federal government could start phasing out the tax credit the company’s customers receive as soon as this year.
The federal government gives people who buy electric vehicles a tax credit between $2,500 and $7,500, depending on the vehicle’s size and battery capacity. As Tesla wrote in an annual reportfiled with the US Securities and Exchange Committee on Friday, its customers get the full $7,500. But two calendar quarters after a company sells its 200,000th electric vehicle in the US, the tax credit begins to phase out.
For the six months beginning in the second calendar quarter after the 200,000th vehicle is sold, customers are eligible for 50% of the credit. That falls to 25% during the six months after that. Once the second six-month period ends, the company’s customers are no longer eligible for that tax credit.
No company has had the tax credit phased out yet, so Tesla could be the first if its projections are correct. In the filing, the company said it expects to reach 200,000 vehicle deliveries to US customers in 2018, which means the phase-out may begin in 2018 if they hit that mark in the first or second quarter.
Losing the tax credit will hurt demand for the Model 3
Since customers don’t get to access the tax credit until they receive their vehicle, the vast majority of those responsible for the Model 3’s roughly 400,000 pre-orders likely won’t be eligible for it. That could lead some potential customers to decide they don’t want the vehicle and ask for a refund on their $1,000 deposit.
The Model 3 is Tesla’s least expensive vehicle to date (it starts at $35,000), so many of its potential customers are more price-sensitive than those who could afford to pay upwards of $100,000 for a Model S sedan or Model X SUV. Losing a $7,500 discount is significant for the average consumer, and combined with the fact that Tesla hasn’t come close to its production targets for the Model 3, some potential customers who would have bought the vehicle with the tax credit and a somewhat timely delivery will do the math and look elsewhere.
The number of consumers who make that decision will go a long way toward determining whether Tesla can transition from a luxury automaker to a mass-market one.
An earlier version of this story incorrectly stated that the electric vehicle tax credit begins to phase out the calendar quarter after a company sells its 200,000th electric vehicle.