Why Is Tesla Mad About New EV Tax Credits?

The stock market once again proved its resilience on Thursday, managing to mount a substantial comeback from large declines earlier in the day. The Nasdaq Composite (^IXIC 0.10%) even managed to post a modest gain by the end of the trading session, and although the S&P 500 (^GSPC 0.02%) and Dow Jones Industrial Average (^DJI -0.11%) finished lower, they were well off their worst levels by the close.

Data source: Yahoo! Finance.

The electric vehicle industry has been a hotbed of activity, with investors remaining highly interested in the wrangling among many players. One potential positive for the EV industry has been the prospect for greater federal tax incentives for renewable energy under the Biden administration. Yet even though EV pioneer Tesla (TSLA 12.06%) would benefit from current proposals in Washington, that hasn't stopped CEO Elon Musk from joining leaders at Toyota (TM 1.07%) and Honda (HMC -0.49%) to cry foul at the provisions.

Image source: Getty Images.

Bigger credits -- with a catch

At first glance, the proposal seems to include a nice boost for EV incentives. An expansion of tax credits would allow for maximum payouts of $12,500 per vehicle, up from $7,500 currently.

However, in order to qualify for the maximum incentive, vehicles would have to meet a couple of requirements. A $500 boost would go toward EVs using domestically sourced electric batteries. More controversially, up to $4,500 would be contingent on the vehicles having been built by workers who are members of labor unions.

It's that latter provision that irks Musk. With Tesla having avoided using union workers, Musk argues that the intent of the provision is specifically to give an advantage to union-labor shops like Ford Motor (F 0.08%) -- even though Ford earlier this year decided to build two of its new electric models not in the U.S. but rather in Mexico.

Tesla is still a big winner

Yet what Musk didn't mention is the fact that the proposed bill is also a big win for Tesla buyers. One of its provisions takes away the initial legislation's phase-out of the credit at 200,000 vehicles, a limit that Tesla had already surpassed. That would effectively make Tesla EVs eligible for $7,500 credits once again.

Nevertheless, Tesla's objections are echoed even more forcefully by foreign automakers. Toyota and Honda noted that their vehicles are actually made by U.S. workers, and penalizing buyers of their EVs simply because those workers didn't choose to unionize is discriminatory and unfair.

Perhaps the ultimate winner of the proposal would be General Motors (GM -0.04%). It would enjoy renewed credits because of the elimination of the original phase-out provision, and it would also potentially qualify for top $12,500 credits because of its union workforce.

An uphill battle

None of the stocks involved in the controversy made big moves on Thursday, with Ford rising just 1% and others making moves of less than 1% in either direction. That's largely because the initial proposal hasn't even gotten out of committee yet, and lawmakers in the deeply divided Senate sound far from convinced about the need for the proposal.

EV adoption is increasing, and while tax credits might help to accelerate the process, major automakers have already committed to moving toward electric vehicles over the long run. It'll be interesting to see how wrangling among lawmakers turns out, but the long-term effect on Tesla, GM, and their peers probably won't be hugely significant either way.