The potential elimination of the $7,500 federal tax credit for electric vehicles under the Trump administration has sparked a debate on its impact on the EV industry. Interestingly, this move could particularly benefit Tesla and its CEO, Elon Musk, who is a prominent supporter of President-elect Trump.
The tax credit, which benefits EV buyers rather than automakers, has allowed for higher EV pricing in competition with traditional cars. When a similar credit phased out in the past, Tesla had to reduce vehicle prices by about half the credit amount. As the world's largest EV manufacturer and the only one currently profitable in the US EV market, Tesla's position is unique. Legacy automakers like GM and Ford admit to losing money on each EV sold, partly due to lower sales volumes compared to Tesla.
If the EV tax credit is removed, EV prices may decrease, but this could reduce Tesla's profits without increasing losses for other automakers. Some might even reduce EV production to limit losses, decreasing competition for Tesla. Despite the tax credit, Musk has used Tesla's profitability to lower EV prices to support demand and pressure rivals.
Musk has indicated support for ending the EV tax credit, stating on his social media platform
“Take away the subsidies, it will only help Tesla,” he posted on his social media platform X in July.
Take away the subsidies. It will only help Tesla.
— Elon Musk (@elonmusk) July 16, 2024
Also, remove subsidies from all industries!
While the auto industry generally wants to keep the credit, Tesla's unique position as a profitable EV manufacturer could see it gain from the change.
The Alliance for Automotive Innovation, representing major global automakers except Tesla, urged Congress to maintain the tax credit, citing the need to compete with Chinese EV production. As legacy automakers introduce more EV models, Tesla's sales have slowed, and it faces increased competition from Chinese EV makers.
Musk, the world's richest person with a net worth of $307 billion, donated $119 million to a political action committee supporting Trump's campaign. Despite a drop in Tesla shares, Musk's shares and options in Tesla increased in value after the election.
During his campaign, Trump promised to end what he called President Biden's "EV mandate," though no such mandate exists federally. The Inflation Reduction Act under Biden restored the tax credit for many EV purchases and provided low-interest loans for automakers building EV and battery factories.
Reuters reported that Trump's transition team plans to end the $7,500 credit as part of broader tax reform, with Tesla representatives supporting the subsidy's end. This could widen Tesla's competitive advantage by making competing EV models less economic, as Tesla is the only profitable EV manufacturer. Analysts suggest this could be positive for Tesla, increasing its stock recommendation to "buy" and raising price targets.
The end of the EV tax credit could have a significant impact on the automotive industry, particularly benefiting Tesla and Elon Musk. With its scale and profitability, Tesla is well-positioned to compete in a market without the EV tax credit, potentially increasing its competitive edge and market share.
