Analyzing the Potential Impact of EV Tax Credit Changes on Tesla’s Future
On Aug. 16, 2022, President Joe Biden signed the Inflation Reduction Act (IRA) into law. While the IRA includes many provisions, one major element is the tax credits for electric vehicles (EVs).
Customers who purchase a new EV can qualify for a tax credit up to $7,500, while those buying used EVs can receive up to $4,000. These credits aim to make EVs more affordable and support a greener, more sustainable environment.
However, President-elect Trump has indicated he may seek to eliminate these EV incentives. This could seem detrimental to Tesla (NASDAQ: TSLA), which is a leader in American EV manufacturing.
Yet, I suggest that Tesla might actually thrive if EV tax credits are removed, should Trump follow through with this plan. Below, I will explore the potential consequences of eliminating subsidies and explain why I believe Tesla will remain resilient in the long term.
Short-Term Effects of Removing EV Subsidies
The adoption of EVs is still in its infancy, with a limited number of companies like Tesla and Rivian focusing exclusively on electric vehicles. Meanwhile, traditional automakers like Ford and General Motors continue to be heavily invested in combustion engine vehicles, even while they commit billions to their EV strategies.
The current small number of competitors, along with the absence of mass production capabilities, has kept EV prices high. Many consumers find EVs set too far above their budgets, prompting the Biden-Harris administration to introduce tax credits to ease these costs.
If these subsidies are removed, EVs will become more expensive, likely leading to a significant drop in consumer demand.
Image source: Getty Images.
Tesla: More Resilient Than Other EV Makers
A decline in demand could impact all EV makers, but Tesla appears less vulnerable than its rivals. Tesla maintains a premium reputation, making its vehicles somewhat of a luxury item, which allows it to insulate itself from the fluctuations of broader EV demand.
In contrast, a loss of tax credits could severely affect smaller EV manufacturers and traditional companies like Ford and GM, which depend on these incentives to attract consumers searching for affordable alternatives to Tesla’s vehicles. Consequently, the competition revolves around pricing rather than quality. As these tax credits disappear, competitors may lose their edge in the market.
Additionally, without subsidies, new entrants to the EV market could find it challenging to compete. The manufacturing of electric vehicles and batteries remains an expensive endeavor, and smaller players may lack the financial resources necessary to shoulder these costs effectively.
Consequently, the absence of tax credits could hinder the progress of smaller companies, further solidifying Tesla’s position in the market.
Elon Musk’s Perspective on EV Tax Credits
Much of the discussion here is speculative. While removing tax credits may affect newer EV manufacturers, it seems less likely to hurt Tesla. However, I cannot assert with certainty that this prediction will hold if President-elect Trump follows through on his plans.
To provide another viewpoint, consider Tesla CEO Elon Musk’s perspective on the IRA and EV tax credits in this video:
Elon Musk: Get rid of all subsidies.
“We don’t need the $7,500 [EV] tax credit. I would say, honestly, I would just cancel this whole [infrastructure] bill. Don’t pass it. That’s my recommendation.
Do we need support for gas stations? We don’t. So, there’s no need for support… pic.twitter.com/GBWjSs7SFD
— ELON DOCS (@elon_docs) November 7, 2024
I share Musk’s outlook: the benefits of subsidies primarily support smaller EV competitors rather than Tesla. In summary, I remain confident about Tesla’s future and its capacity for success, irrespective of the fate of EV tax credits.
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Adam Spatacco has positions in Tesla. The Motley Fool has positions in and recommends Tesla. The Motley Fool also recommends General Motors and offers the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
