Part of the reason electric vehicles (EVs) have grown to be so popular in the U.S. is tax incentives. In the third quarter, EV sales topped 313,000, growing nearly 50% year over year. A big reason for that was the generous $7,500 tax credit created by the Inflation Reduction Act.
This credit has a few stipulations, and the fine print will bite Tesla (TSLA -1.80%), along with a few other EV makers in 2024.
The U.S. government is incentivizing EV makers to source from friendly trade partners
The tax credit is centered around where the battery minerals and components are sourced from. Because the U.S. government wants to source these vital components for EVs domestically or from a free-trade agreement partner, Tesla and its peers must strategically plan their supply chain.
Per the law, the credit is split 50/50 between the battery components and minerals. Companies can be eligible for half of the credit if they meet the thresholds for one of the two. The minimum threshold also increases each year to bring manufacturing to friendly countries. To be eligible for the credit, an EV maker must meet the following minimum amounts per vehicle:
| Year | Minerals | Components |
|---|---|---|
| 2023 | 40% | 50% |
| 2024 | 50% | 60% |
| 2025 | 60% | 60% |
| 2026 | 70% | 70% |
| 2027 | 80% | 80% |
| 2028 | 80% | 90% |
| 2029 | 80% | 100% |
Data source: Department of Energy.
Because the thresholds are rising in 2024, some companies will lose the credit they had in 2023. One of those vehicles is the Tesla Model 3 long-range RWD due to China-sourced batteries. Additionally, the Model Y may also lose some of these incentives.
Tesla isn't alone in this; the Ford Mustang Mach-E will also likely lose half of this credit in 2024.
We won't know for a while which vehicles officially do and don't qualify for these credits, but it will be a large shakeup in the automotive industry. The question is, will EVs be as attractive if they aren't subsidized through government incentives?
Additionally, Tesla has already cut prices as interest rates rose to compensate for higher payments. With the incentive being removed, investors will be curious to see if it adjusts the vehicle price as a result.
There are many unknowns about what losing the EV credit will do to Tesla, but does that affect stock sentiment?
Tesla stock is unlikely to drop on this transition
Tesla has had a strong 2023, with the stock more than doubling. Still, it's nearly 40% down from its all-time high set in late 2021.
Valuing Tesla's stock isn't easy, as investors highly value the future opportunities in front of it. Whether it's the Cybertruck, its future EV semi-truck, full self-driving capability, robotaxis, or robots, if Tesla can deliver on half its promises, it will solidify itself as one of the most important companies on earth.
However, I don't think the EV credit will drastically shift long-term trends. Like it or not, government regulation is pushing for the adoption of EVs. The DOE may also change the credit rules, although that's just speculation. But even if it doesn't, the manufacturers will continue to move their sourcing practices to meet regulations to incentivize consumers to buy EVs.
While unfortunate for EV buyers, I doubt Tesla losing its credit for some vehicles affects overall sales too drastically, especially since much of the competition also has the same issue.
If you're looking for a buying opportunity for Tesla stock, this probably won't provide the drop you want. But if you're confident in Tesla's long-term trajectory, this news shouldn't affect your stock ownership plan.
