• President Trump quashed all hopes of an electric vehicle tax credit extension.
• Tesla sales take a hit after expiration of tax credits worldwide.
• The impending arrival of competitors in the U.S. will worsen the effects of tax credit expiration.

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.

There was strong bipartisan support  in the Senate for the extension of the tax break. It was removed from the $1.4 trillion federal spending after extreme resistance from President Trump .

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.

Tax Credit was Socialism for the Rich and Won’t be Extended Ever

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.

Tesla Sales Crash in the Absence Subsidies

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.

Competition will Exacerbate the Negative Effects of Tax Credit Expiration

Currently, all automakers that haven’t sold 200,000 cumulative EVs in the U.S. qualify for the $7,500 tax credit. After the 200,000^th 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 200,000^th 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.