Tesla Federal Tax Credits

The industry has been full of stories and discussions about electric vehicles because they are seen to be new and it is a market segment that will grow significantly over the next decade thanks to Government policy, buyers needs and wants changing and also around environmental concerns. Electric cars aren’t new – in fact they were around at the beginning of the industry and it was Government policy that pushed buyers to mostly petrol cars.

In recent years Governments around the world have been caught out several times by canny manufacturers either providing the emissions test results required by departments or by simply lobbying and influencing another Government such that their products become favourable. As an example in Germany, the Government wanted to protect one of their biggest industries, namely the major car manufacturers, and lobbied on their behalf with other Governments. The outcome was threefold:

1. The European Government imposed emission limits and the countries then accepted the manufacturers test results without auditing them – this resulted in the VW Emission scandal a few years ago.
2. The German Government lobbied the other European Governments to reduce tax and other duties on diesel cars and on the fuel itself, making it more cost effective for a buyer to choose a German branded vehicle – being the largest producer of diesel cars.
3. On finding the results of the tests were not truly accurate, many diesel cars lost a temporary chunk of their worth impacting those buyers who wanted to get into another vehicle.

Governments have a very important place in the buying decision, as described above, if the duty on a fuel is cheaper and the economic cost of running a vehicle is acceptable, a buyer will naturally choose a car or van that uses that fuel. We are now in a similar position with electric cars. Governments are providing a benefit to switch and in the US that means a Federal Tax Credit for buyers of electric powered vehicles. However that credit is only temporary and is based on the success of the manufacturer which means that once that company has reached 200,000 units delivered, the credit starts to shrink back to zero!

Tesla has just hit that limit in the US and now their cars are going to rise in price as the credit reduces. In August the 200,000th vehicle was delivered and that potentially gives Tesla a four month window to generate some big sales numbers. Unfortunately for Tesla, the timing couldn’t have been worse with quality and production issues still hampering their factory in northern California, because the credit that the buyer gets is based on the delivery date, not the purchase date. This might mean that Tesla will have to absorb that credit themselves if they cannot get a vehicle delivered on time.
The ruling for the tax credits is as follows:

• Prior to the end of December, if a vehicle is delivered to its owner, that owner can claim a tax credit of $7,500.
• Between January 1st 2019 and June 30th 2019, the credit is cut in half to $3,750.
• Between July 1st 2019 and 31st December 2019, the credit is cut again by half to $1,875.

The qualifying statement is always that the credit is dependant on the buyer’s personal tax situation!

What does this mean for Tesla? We know that the Model S and Model X are coming off the production line and are priced at a luxury level, so the loss of a credit might dampen sales a little. We do know that these cars can be delivered on time. Where the issue lies, is with the Model 3, which was supposed to be the high volume, lower priced model. Tesla are struggling to get this model out of the factory with an acceptable level of build quality despite taking over the NUMMI factory in Fremont that was used to a build rate of 430,000 Toyota and GM vehicles with over 4,500 employees. According to Peter de Lorenzo at the AutoExtremist, Tesla are struggling to build 100,000 vehicles with more than twice the employees at the same facility!

More importantly, there are other manufacturers about to come on stream that could easily take sales away from Tesla. These include Faraday Future, Fisker and Karma, the last two splitting away from each other to compete. All these manufacturers are yet to get anywhere near the 200,000 units delivered, so they have time (and possibly pricing) on their side. Then there are cars from BMW and other international manufacturers that could be imported – depending on tariffs, that could hurt Tesla as well.

Throughout this year, it became increasingly clear that 2019 was going to be a big year for Tesla and for electric vehicle sales in general. It has possibly got harder in recent weeks with the announcement of the tax credits winding down and several meltdowns by Tesla’s founder, Elon Musk.