President Trump has blocked the extension of an electric vehicle tax credit, and that's disastrous news for Elon Musk's Tesla.
Shares of Tesla (NASDAQ:TSLA) skyrocketed on Monday on the hopes that there may be an extension to the federal tax credit for purchases of Electric Vehicles (EV). Tesla stock jumped roughly 23 points and its market cap touched new all-time highs. Despite Elon Musk once claiming Tesla doesn’t need subsidies to be successful, the company was reportedly lobbying hard for the extension.
Surprisingly, Tesla stock didn’t react to the cut, despite jumping in anticipation of an extension. However, the muted reaction shouldn’t distract investors from the fact that this news is disastrous for Tesla.
According to a survey by Morgan State University, the primary benefactors of the federal tax credit have been rich people. Eighty percent of EV buyers had an annual household income of over $100,000. In a world where wealth inequality is a big concern, the government subsidizing the luxury purchases of the rich can’t be justified.
The federal government stands to lose a lot of tax revenue as more EV companies enter the market. With the U.S. budget deficit already soaring over a trillion dollars, the tax credit is highly unlikely to ever be extended.
While Elon Musk may claim that his company doesn’t need subsidies to be successful, evidence points to the contrary. Data suggest Tesla wouldn’t even have survived without government freebies.
As evident from sales trend in Denmark and Hong Kong, sales of the EV-maker have never recovered from subsidy expiration. In the U.S., Tesla had to slash prices of the Model 3 multiple times after the tax credit was halved in July 2019.
Tesla’s losses have increased in lockstep with its revenue. Given the horrible economies of scale, it’s clear that Tesla wouldn’t have survived for as long as it has without government handouts.
Currently, all automakers that haven’t sold 200,000 cumulative EVs in the U.S. qualify for the $7,500 tax credit. After the 200,000th unit has been sold, the tax credit is gradually phased out.
Tesla hit the 200,000 mark last year and its tax credit is set to completely phase out on Dec. 31. Any Tesla cars delivered after that date won’t be eligible for any kind of tax break.
Apart from the Tesla, the only other company to be above the 200,000 cap is General Motors. Most of Tesla’s competitors have barely sold 100,000 EVs in the U.S., so they’ll have a direct $7,500 price advantage over Tesla for a long time.
And since the tax credit phase out is gradual, automakers will continue to enjoy a significant price advantage over Tesla for over a year after they sell their 200,000th unit. The impending arrival of tens of new EVs will only aggravate the negative effects of tax credit expiration for Tesla.
Tesla is already struggling with profitability and doesn’t have enough cash to fund its future projects. And with aforementioned headings added to the equation, the future looks bleak for Elon Musk’s company.
This article was edited by Sam Bourgi.
Last modified: January 22, 2020 11:40 PM UTC