Tesla Model 3 Could Lose EV Tax Credit, Report Says. The Stock Is Still Up.
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A rear-wheel drive Tesla Model 3 costs about $43,000 to start.
Allison Dinner/Getty Images
Car companies loved it when the U.S. government rolled out its $7,500 tax credit for people who buy electric vehicles. Now the sector might not be so sure how it feels.
On Thursday, EV news outlet Electrek, citing people familiar with the matter, reported that
Tesla
(ticker: TSLA) expects its lowest-priced Model 3 sedan will lose eligibility for the full $7,500 tax credit, because the car uses LFP batteries sourced from China.
Tesla
and the Internal Revenue Service, the government agency responsible for implementing the tax credit, didn’t immediately respond to a request for comment.
LFP batteries—meaning lithium-iron-phosphate batteries—cost less, but have less power per unit of volume. The auto industry tends to use them in EVs with a lower per-charge range.
Losing the entire credit, which was passed as part of the Inflation Reduction Act, would be a surprise. The credit depends on many factors, including where batteries and battery materials are sourced, and where battery packs and vehicles are assembled. The Model 3 is assembled in Fremont, California.
A rear-wheel drive Model 3 costs about $43,000 to start. A performance version of the 3, which would likely continue to qualify for the $7,500 credit, starts at about $54,000.
Tesla would be able to fix any possible tax credit issue from LFP batteries by putting more expensive, U.S.-sourced batteries in the base Model 3. The extra cost would likely be far less than the $7,500 benefit. Such a change would also depend on whether Tesla had enough batteries available from its manufacturing sites in Nevada and Texas.
This isn’t the first time that the auto industry and car buyers have found IRS policies confusing. Initially, the IRS extended the full credit to all qualifying EVs after the Inflation Reduction Act was passed, no matter where battery and battery materials were sourced from. That was good news for the industry overall.
Another area of confusion was when the IRS classified the 5-seat version of the Tesla Model Y and
Ford Motor’s
(F) Mustang Mach E as sedan-like vehicles at first. That meant they couldn’t be priced higher than $55,000 to qualify for the EV tax credit. The base level of the Model Y is now about $55,000. A Ford Mach E can range from about $49,000 to $62,000.
However, the IRS considered other similarly sized vehicles to be SUVs; SUVs and trucks can be priced up to $80,000 to remain eligible for the EV tax credit. The agency later reversed the decision so that Mach Es and Model Ys are now treated like SUVs for the tax break.
The IRS is expected to update regulations at some point in the coming few weeks as it works through various issues, including where batteries come from. That means the list of what credits various EVs qualify for could change again. It’s a source of uncertainty for investors that could lead to some EV price changes, at the margins. It shouldn’t lead to huge shifts in buying behavior or EV market share.
For car buyers, if they are going to buy an EV in 2023, they might want to consider doing it before the end of the first quarter, before there are any changes to the current list of eligible vehicles. Otherwise they might not get the tax credit they were hoping for.
Tesla stock appears immune to reports about tax credit concerns, however. Tesla shares are up 3.4% in early trading Thursday. The
S&P 500
and
Nasdaq Composite
are up 01.5 and 2.2%, respectively. Stocks are bouncing after dropping Wednesday, when the Federal Reserve decided to raise interest rates by 0.25 percentage point. Tesla stock dropped 3.3% Wednesday.
Write to Al Root at allen.root@dowjones.com
