Time is running out on a tax credit for Tesla buyers

Credit falls by 50% on Monday, eliminated by 2020

By Chris Isidore, CNN Business
Joe Raedle/Getty Images

(CNN) - The federal tax credit for Tesla buyers falls by 50% on Monday and will be eliminated altogether at the start of 2020.

The reduction of the tax credit makes buying a Tesla more expensive, because the credit reduces the federal tax bill for buyers. So Tesla could suffer a drop in sales or feel pressure to cut prices, either of which would be bad news for a company struggling to return to profitability.

"When Tesla loses any part of that credit, it undeniably loses a segment of its customer base," said Karl Brauer, executive publisher of Kelley Blue Book. "It's never going to help them sell more cars, it's only going to hurt."

Buyers of plug-in vehicles, both pure electrics and plug-in hybrids, are eligible for a $7,500 credit that reduces their federal taxes by that amount. But once a manufacturer has sold 200,000 of those cars to US buyers, the credit starts being phased out.

Tesla was the first to hit that mark, and the credit for its buyers fell to $3,750, on January 1. On Monday, July 1, it will decline to $1,875. General Motors is the only other automaker to have sold enough cars to have its tax credit reduced. But that won't happen to GM until October. To receive the tax credit, a buyer must take delivery of a car by the deadline, not just order it.

Most of the $7,500 tax credits went to buyers of the Tesla Model S and Model X, two luxury models that can cost more than $100,000 with options. The Model 3, a lower priced car aimed more for the mass market, can cost between $50,000 and $60,000 with various options such as a longer-range battery and self-driving features.

But buyers of the Model 3, which has a starting price just above $35,000, need the tax credit more than the wealthier buyers of the Model S or Model X, Brauer said.

"The Model 3 is still an expensive car for the everyman," he said. "They need as much of a credit as they can get."

Tesla made a big push to get cars delivered to buyers in December, before the credit dropped for the first time. It even sold customers the dealer floor models used for test drives.

Tesla has made less of a fuss this time. Company spokespeople did not respond to CNN Business' questions about the deadline or the reduced credit's potential impact on sales. CEO Elon Musk said in a tweet two weeks ago that customers could order a car online and return it within seven days of delivery for a full refund if they weren't happy with the car.

The slow demise of the tax credit puts Tesla in a squeeze.

The December sales push, for instance, encouraged some people to buy, but that then contributed to a big drop in sales in the first quarter of 2019. In early January, Tesla announced a $2,000 price cut, but that hurt profits and Tesla lost money in the first quarter after a pair of profitable quarters.

In Washington, some lawmakers have proposed restoring the full $7,500 tax credit for all automakers until they sell 600,000 plug-in vehicles. Competing legislation to eliminate the tax credit altogether and impose a federal tax on electric vehicles has also been introduced. Neither bill has had so much as a committee hearing, let alone a vote.

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