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Following Stimulus Approval, This Catalyst Could Give Tesla a Massive Boost

By Evan Niu, CFA - Mar 11, 2021 at 9:00AM

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Lawmakers may soon bring back the federal tax credit for electric vehicle manufacturers that have already hit the existing volume cap.

With the latest COVID-19 stimulus bill expected to be formally passed this week, Democratic lawmakers are expected to turn their attention to the next major item on President Biden's agenda: electric vehicles (EVs). Promoting EV adoption was a core pillar of Biden's campaign, and the federal government has already started to move forward in converting its fleet to electric vehicles. The president also wants to invest heavily in charging infrastructure, hoping to deploy 500,000 new EV chargers across the country.

Beyond all of that, there is a massive catalyst for Tesla (TSLA 5.14%) that could be on the horizon.

Red Model 3 sedan driving with a city skyline in the background

Model 3. Image source: Tesla.

Resurrecting the federal tax credit

Last month, Representative Mike Thompson reintroduced the Growing Renewable Energy and Efficiency Now (GREEN) Act, which was initially unveiled last summer. The proposed bill includes a wide range of tax policies designed to combat climate change and accelerate the broader shift to renewable energy technologies. Here's the part of the GREEN Act that could give Tesla a significant demand boost: It would effectively reinstate the federal tax credit available to consumers when they purchase a Tesla.

As a refresher, existing law provides a federal tax credit of up to $7,500 when consumers buy a qualifying EV, but that credit begins to phase out once the manufacturer reaches 200,000 in U.S. unit sales. Thus far, only two automakers have reached that threshold: Tesla and General Motors (GM 2.69%). The credit fully went away for Tesla at the end of 2019 and for GM at the end of Q1 2020.

The GREEN Act would lift the volume cap from 200,000 to 600,000, while reducing the credit from $7,500 to $7,000 after the manufacturer hits the original limit of 200,000. However, the phase-out period would also be restructured and shortened. Currently, the phase-out period lasts about six quarters. Under the GREEN Act, it would be just one quarter. After selling 600,000 qualifying EVs, the credit would drop by 50% for one quarter before being eliminated altogether.

Two Bolt EUVs driving on a road

Bolt EUV. Image source: General Motors.

Overall, the proposed legislation would spur considerable demand for all EVs for many years to come, but Tesla and GM in particular would incrementally benefit more than others since they have already hit the existing limits. Tesla's most affordable vehicle is currently the Standard Range Plus Model 3, which is priced at $36,990. Resurrecting a $7,000 federal tax credit would bring that cost down below $30,000 -- before factoring in savings from fuel and maintenance or additional incentives from state and local governments.

GM recently announced the 2022 Bolt EV, which will start at an even more affordable $31,995. The company is also launching a Bolt electric utility vehicle (EUV) crossover with an entry-level price of $33,995. The credit would bring those starting prices down to $24,995 and $26,995, respectively, also before considering other savings and incentives. Both vehicles are launching this summer.

Of course, the GREEN Act is currently still just a proposed bill facing a meandering path to potentially getting passed into law. EV investors will want to keep a close eye on whether the legislation makes its way through Congress.

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