No Good Deed Goes Unpunished: The $7,500 Tax Credit and Tesla’s Production Paradox

LANCE MAYNARD—Automation issues. Production bottlenecks. Contractors moving at the pace of “drunken sloth[s].” Just a few of the many complications that have frustrated Tesla’s efforts to meet its Model 3 production targets. Although delays associated with the highly-anticipated sedan were always expected (due in part to Tesla Chairman and CEO Elon Musk’s lofty, perhaps unrealistic production forecasts), the company has implemented an unconventional strategy to make up for lost ground. According to the BBC, Musk has encouraged Tesla employees to walk out of meetings, ignore the chain of command, and circumvent company policies to increase output from 2,000 to 6,000 cars per week in the firm’s California plants. Yet Tesla’s race to ramp up production may also come at a significant cost—due to a relatively short, overlooked section of the U.S. Internal Revenue Code.

According to 26 U.S.C. § 30D, buyers of new plug-in electric vehicles (like the Tesla Model 3, S, X, and GM’s Volt) currently receive a one-time income tax credit that ranges from $2,000–$7,500 depending on the vehicle’s battery size. However, the statute also contains an important limitation: once a manufacturer sells 200,000 electric cars in the United States, a phase-out period begins, and the tax credit for that manufacturer’s vehicles is eventually slashed to zero. The phaseout provision, 26 U.S.C. § 30D(e)(2), was not happily drafted, but a simple example will serve to illustrate its mechanics:

Let’s say that Tesla meets the 200,000 vehicle mark in June of this year (the company’s annual report, filed in February, suggested that it would meet the threshold sometime in 2018). In that case, buyers of any new Tesla vehicle in the same or subsequent calendar quarter (from June 2018 through September 2018) would receive the full $7,500 tax credit. Tesla customers who purchase their vehicles in the subsequent two quarters (from October 2018 through March 2019) would receive 50% of the credit, or $3,750, and customers who purchase in the following two quarters (from April 2019 through September 2019) would receive 50% of that diminished credit, or $1,875. After that, the credit will vanish altogether.

Tesla and GM (along with a number of United States electric utilities) have lobbied to lift the 200,000 vehicle limit by amending 26 U.S.C. § 30D. But the success or failure of those lobbying efforts will have a disparate impact on Tesla relative to others. Although GM also expects to reach the 200,000 mark in 2018, electric vehicles make up just two percent of its total vehicle sales. By comparison, 100% of Tesla vehicles are electric. The $7,500 credit is undoubtedly an incentive for first-time Tesla buyers, and its loss will have a significant effect on customers who are already uneasy about the Model 3’s $35,000 starting price.

The Model 3 is the best-selling electric vehicle thus far in 2018. But until Congress lifts the 200,000 vehicle limit, Tesla and other manufacturers are set to lose one of their most valuable sales incentives—one that has never cost them a dime. Should Tesla eventually meet its production targets, the company’s success will serve as a symbol that the competitive U.S. car market is ready for large-scale electric vehicle deployment. However, Tesla’s obsession with increasing production capacity also brings it closer to an uncomfortable situation: one with increased costs to customers and a potential drop in Model 3 demand.

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