Tesla said a $7,500 federal tax credit on Model 3 and Model Y electric vehicles will likely be reduced after December 31, according to changes to the automaker’s website late Tuesday.
“Customers who receive shipments of new Teslas that qualify and meet all federal requirements are eligible for a tax credit of up to $7,500,” the website states. “A reduction in the current federal tax credit is most likely after December 31.”
EV tax incentives, in addition to Tesla’s many price cuts, have helped the automaker achieve record deliveries. If Tesla loses the tax credit, it could still fall back on a credible (and controversial) price cut, but analysts fear that such a strategy would seriously impact the company’s margins.
Tesla didn’t say why it expects to lose the federal tax credit on its vehicles by the end of 2023, but it could be due to the government’s plans to impose tougher rules on batteries next year.
The tax credit is divided into two parts, each worth $3,750: the battery requirement and the critical mineral requirement. To be eligible for battery requirements by 2023, 50% of vehicle batteries must be assembled or manufactured in North America. Next year, that percentage jumps to 60%.
To meet critical mineral needs by 2023, 40% of the critical minerals in car batteries must be extracted or processed in the US, or from countries with free trade agreements with the US. In 2024, that percentage will be 50%. Additionally, by 2024, vehicles cannot source battery parts from a foreign country of concern, AKA China, and by 2025, electric vehicles must not contain any essential minerals sourced from China or any other country of concern, if they want to maintain their credit. .
Tesla uses batteries from Chinese company CATL and South Korean company Panasonic for its Model 3. Automakers have recently knocked BYDChinese automaker, for Model Y batteries.
A tough requirement is US efforts to end dependence on China for manufacturing batteries and parts. Despite billions of dollars of investment from carmakers and battery manufacturers on the ground, that dependency will be difficult to end.
Six of the top 10 battery manufacturing companies are based in China, a country that dominates production of cathode, anode and processed battery materials. By 2022, China has more battery production capacity than the rest of the world combined, at 838 GWh. That compares with the US’s 70 GWh, according to BloombergNEF data. US battery production capacity is expected to grow 10x by 2027 to around 908 GWh, but that’s paltry compared to the 600% increase China is expecting.
The warning from Tesla could also be a move to drive more sales this year, encouraging buyers to order a Model 3 or Y in the next few months while there is almost no guarantee of receiving full credit. Tesla just got the green light for its Model 3 to be eligible for full credit, not just half, in June. All Model Ys have been qualified since regulations went into effect.