Home » Trump may end the $7,500 EV tax credit. Elon Musk and Tesla would reap the rewards

Trump may end the $7,500 EV tax credit. Elon Musk and Tesla would reap the rewards

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The $7,500 tax credit for buyers of electric vehicles could be vanishing early in the new Trump administration, but that might actually be good news for Tesla and its CEO Elon Musk, one of President-elect Donald Trump’s most prominent backers.

While the US tax credit goes to EV buyers, not to the automakers themselves, it allows higher pricing for EVs as they compete with traditional gasoline-powered cars. When an earlier version of the tax credit phased out several years ago, Tesla was forced to cut prices on its vehicles by roughly half of the amount of the credit its buyers were no longer getting.

Tesla, the world’s largest maker of EVs, is the only automaker making a profit on its US EV sales. Legacy automakers such as General Motors and Ford admit they are losing money on every EV they sell, partly because they are selling only a fraction of Tesla’s EV volume. When Tesla sold a relatively small number of EVs back in the last decade, it also lost money – but it is now among the most profitable automakers.

So if the EV tax credit goes away, the price of all EVs might come down. But that would only reduce Tesla profits, not increase losses the way it might at established automakers trying to get into the market. Some of those automakers might even pull back on their EV production and sales in order to limit the losses, which would mean less competition among EV buyers for Tesla.

Even with the EV tax credit in place, Tesla and Musk have used this greater profitability to cut prices on his EVs in order to support demand in the face of greater competition and to put pressure on his established automaker rivals.

Musk signaled during the campaign that he would support ending the EV tax credit, even if raised the cost of Tesla purchases for American buyers.

“Take away the subsidies, it will only help Tesla,” he posted on his social media platform X in July.

But the rest of the auto industry wants to keep the tax credit in place. The Alliance for Automotive Innovation, an industry trade group which represents all of the major global automakers other than Tesla, wrote a letter to Congress in October, ahead of the election, urging that the tax credit remain in place.

The letter says US manufacturers rely on the credit to compete with the EV production and advancements by Chinese automakers. Global automakers have invested billions of dollars in a transition from gasoline powered cars to electric vehicles.

As legacy automakers have introduced more of their own EV models to American car buyers in recent years, Tesla’s sales have slowed. It also is seeing increased competition from Chinese EV makers in the Chinese and European markets. Tesla’s sales for the first nine months of this year trail sales for the same period in 2023, the first time it has ever posted a decline over that long of a period.

Musk, who donated $119 million to a political action committee supporting Trump’s campaign according to Federal Election Commission filings, is the world’s richest person, with a net worth of $307 billion based on Bloomberg’s Real Time Billionaire Tracker.

While the 715 million shares and options to buy Tesla stock that he holds took at $13.6 billion hit from the drop in Tesla shares Thursday, those shares and options shot up in value the day after the election. Even with Thursday’s decline they are still worth $42.7 billion more than than where Tesla shares closed on election day.

During his campaign, Trump continually promised to kill what he called President Joe Biden’s “EV mandate,” although no such mandate exists in federal law. The Inflation Reduction Act passed under Biden restored the tax credit for many EV purchases, and it also provided low interest loans for automakers building things like EV and battery factories.

Reuters, citing two sources with direct knowledge of the matter reported Thursday that Trump’s transition team is planning to kill the $7,500 credit as part of broader tax-reform legislation. And representatives of Tesla have told a Trump-transition committee they support ending the subsidy. CNN has not confirmed those plans or discussions.

The Reuters report sent shares of Tesla and other automakers lower in trading Thursday. But several analysts who follow Tesla agree that the end of the credit would be a positive for the EV leader. Tesla (TSLA) shares rebounded a bit in premarket trading Friday.

The end of the credit “will widen Tesla’s competitive moat by making competing EV models even more uneconomic, as we believe TSLA is the only profitable manufacturer of EVs,” wrote Garrett Nelson, analyst for CFRA Research, in a note to clients the day after the election. “For these reasons, we now view Tesla shares as deserving of higher multiples, but acknowledge challenges in the near term.”

He raised his recommendation on the stock to “buy” from “hold,” and raised his 12-month price target to $375 from $265. Nelson also said Trump’s election could speed approval for Tesla’s plans for self-driving vehicles.

“Tesla has a scale and scope that is unmatched and while losing the EV tax credit could also hurt some demand on the margins in the US, this will enable Tesla to further fend off competition from Detroit,” wrote Dan Ives, tech analyst for Wedbush Securities, in a note Thursday. He said that Tesla’s pricing and scale in the EV space “is an apples to oranges when compared to the rest of the auto industry once the EV tax credit disappears.”

Source: edition.cnn.com

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