Tax Credit Blues: Automakers Grimly Await a Looming Phase-out

Should Tesla hit its vaunted 5,000-Model-3s-per-week production target at the end of this month (a figure that means nothing if it can’t be sustained over the long term), the electric automaker faces another hurdle: the impending phase-out of the $7,500 federal EV tax credit.

While Tesla isn’t the only automaker staring down the barrel of this incentive loss, it’ll be the first to cross that line. Estimates place the phase-out point in July, though the taps only begin turning off two quarters after the automaker hits the 200,000 plug-in vehicles mark. Unlike some of its its electric rivals, however, the impact on Tesla won’t be as painful.

That buffer is a higher retail price than most of its competitors, even for the lesser Model 3. Also helping Tesla is the brand’s curious reputation as being the only builder of “pure” electric vehicles — ie, vehicles not tainted by the existence of internal combustion vehicles in the brand’s portfolio.

Many buyers who preach the EV gospel online will only be seen driving a Tesla, regardless of the fact that a Chevrolet Bolt or Nissan Leaf also boasts zero tailpipe emissions. A curious thing.

According to Automotive News, Tesla had sold an estimated 193,344 vehicles in the U.S. by the end of March 2018, placing its tax credit cut-off sometime next month. This means the available federal credit drops by half for buyers starting January 1st, 2019. After a half-year with $3,750 dangling in front of buyers’ faces, the credit halves again before its elimination six months later.

General Motors, which sold an estimated 181,062 plug-in vehicles by the end of March, should hit the phase-out mark early next year. Nissan, which had 120,119 plug-ins under its belt at the end of March, should become the third automaker to see its credits cut off, followed by Ford. Depending on your attitude towards the use of tax dollars, the phase-out will either be met with cheers or jeers.

The staggered nature of automakers hitting the phase-out point means late adopters of electric and plug-in powertrains stand to benefit from being last, at least on the low end of the price scale.

“The groundbreakers, the people who forged ahead and got these products out there first, could be at a significant disadvantage now,” Rebecca Lindland, executive analyst at Kelly Blue Book, told Automotive News. “I don’t think it’s fair to reward a company that hasn’t been as innovative with an incentive that begins when someone else’s ends.”

Plug-in vehicles of all types currently make up about 1.2 percent of the U.S. auto market, with IHS Automotive predicting we’ll only see 10 percent market coverage in 2025. A 2016 study by Gil Tal, a researcher at UC-Davis, found that 29 percent of plug-in vehicles bought between 2010 and 2014 wouldn’t have left the dealer lot had it not been for the tax credit. Of those vehicles, Chevrolet’s Volt stood out as a vehicle significantly impacted by the incentive. 40 percent of Volt buyers claim they wouldn’t have bought one had Uncle Sam not given the MSRP a haircut. In contrast, only 14 percent of Tesla buyers said the incentive swayed them at all.

Currently, the all-electric Chevrolet Bolt stickers for $37,495, while the Model 3 starts at $44,000 and climbs upward in a hurry. Tesla isn’t expected to start building the base, $35k version in any large numbers until the beginning of next year. Yes, Teslas remain status-boosting accessories for well-off (or at least financially comfortable) brand loyalists and enthusiasts, regardless of what Elon Musk promises for the future. A reduced or eliminated financial incentive matters less.

It’s no wonder GM lobbied the Trump administration to extend the federal tax credit. Once the Bolt loses its government incentive, the closest comparable model in terms of range and sticker price — sold by an automaker with remaining credits — stands to look a lot more enticing. In this case, that vehicle would be the longer-ranged Nissan Leaf, due out at the end of the year.

“Will it make some consumers look at a brand that still has the tax credit eligible? Absolutely,” said Rachel Shue, an automotive consultant with IHS Markit. “But are some consumers going to return to the place where they bought their first EV because of new and exciting products? Absolutely as well.”

It’s not just the disappearing government incentive that stands to shake up the retail and lease price of electric vehicles. As production costs dip further and buyer demand rises, manufacturers will be encouraged to actually try and make money from the sale of EVs, or at least stem the loss. Tyson Jominy, director and head of automotive consulting at J.D. Power and Associates, nicely illustrated this in a weekend Twitter thread.

[Image: General Motors, Nissan]