A Fast-Approaching Deadline for Tesla Is ‘When the Rubber Meets the Road’

The company has a big challenge ahead.

Tesla Model S

Tesla’s vehicles are set for a major price jump in less than a month as it uses up the remainder of the automaker’s federal tax credit benefits for electric cars. The gradual phase-out is in part triggered by Tesla’s high sales figures, the law requires that the subsidies begin winding down after an automaker has sold 200,000 cars. But the deadline still has analysts speculating that the firm will face a tough challenge as it tries to compete against automakers still eligible for the full benefit.

“Most people think that’s when the rubber meets the road, when that tax credit drops,” Jeffrey Osborne, senior research analyst for investment bank Cowen & Company, told the New York Times Monday. On July 1, the tax credit will halve in value to just $1,875.

The cut could place pressure on Tesla to lower prices, or provide incentives to help distinguish itself from the competition. Buyers that opt for a Tesla will be buying into CEO Elon Musk’s vision of a tightly-integrated electric car with a global network of rapid chargers and the promise of fully autonomous driving via a future software update. All that has helped make Tesla cars beloved, but it’s still fair to wonder how beloved they will when the competition will benefit from an additional $6,000 in tax credits.

The timing is also bad. As Electrek reported last week, the company is making an end-of-quarter final push to break its sales record. The automaker reportedly delivered 33,000 cars in North American two months into the quarter and aims to deliver a further 33,000 to the region in the final month of the quarter. This would be enough to put the firm on good track to set a new record in 2019, after its delivery total for 2018 nearly tripled year-over-year.

Tesla Price Rising: What to Know

Electric car buyers are normally entitled to a maximum of $7,500 in tax credit from the federal government in the year of their purchase. The scheme was introduced in 2008 as a means of promoting electric car adoption. This nationwide incentive can be on top of any potential extra state-level incentives, like California’s $2,500 Clean Vehicle Rebate for battery-powered vehicles.

The Tesla Model 3.
The Tesla Model 3.

The incentive works as a tax deduction on an annual return, which could mean some receive less than the full amount. If a buyer is expected to pay less than $7,500 in taxes, the credit will reduce the taxes owed that year to zero but the consumer won’t receive the leftover credits. Buyers have to fill out form 8936 to qualify.

In 2018, fueled by the success of the sub-$50,000 Tesla Model 3 released the previous year, Tesla became the first company to sell over 200,000 electric cars in the United States. This triggered a gradual phase-out of the federal tax credit, starting on January 1 when the incentive halved to $3,750. The incentive is set to drop to $1,875 on July 1, before disappearing completely on January 1, 2020. Tesla is expected to be the first automaker to have to sell electric cars without any federal subsidies at all.

It’s unclear how Tesla will respond to the reduction, or if there will be a response in the first place. Following the January credit cut, the company announced the long-awaited launch of the $35,000 Model 3 that set a new cheapest-ever price for the company’s cars. In March the firm announced a six percent price cut to all of its other vehicles, fueled by an aggressive change in strategy that involved closing almost all of its stores. The plan was met with derision from owners that used the stores to convince others to buy, and Tesla partially reversed its decision by halving the closures and only cutting prices by three percent.

With a further cut to the subsidy, Tesla will face stiffer competition from rivals. The Chevrolet Bolt starts at $36,620, which when bundled with tax credits, undercuts the Model 3 substantially. The 2019 Nissan Leaf, the continuation of the world’s best-selling electric car, starts at $29,990 before credits. The Polestar 2, the upcoming electric car from the Volvo Car Group, is set to cost $63,000 when production starts in February 2020, undercutting the $59,900 Model 3 Performance after tax credits.

Tesla may have set staggering delivery records and smashed sales in the United States, but its toughest days may be still to come.