This week, consumers searching for a new sedan in California discovered they could buy a Tesla Model 3 for as little as $25,240 after tax breaks – less than a Toyota Camry – long one of the best-selling mass-market cars sold in the United States.
How did this happen? It’s a testimonial to Tesla’s skill at managing supply chains and playing American EV subsidy machinery like Brad Paisley picking a Telecaster.
Last summer, Model 3s were priced like German luxury cars, starting at $57,990 before tax breaks. The least expensive versions of the car came with a $3,750 federal tax subsidy – half the maximum tax credit on offer because its batteries were not made in the United States.
As of this week, however, Tesla and then the U.S. government said the cheapest Model 3 will now qualify for a $7,500 federal tax credit. In California, the state kicks in another $7,500. Those subsidies, combined with Tesla’s decision to cut the starting price of a Model 3 to $40,240, transform the Model 3 into an “affordable” car in a market where the average vehicle sells for more than $48,000.
Tesla did not explain how it worked this pricing magic, but analysts said the company must have found a way to produce more Model 3 batteries in a location that qualifies for the full $7,500 tax credit available under the U.S. Inflation Reduction Act (IRA.)
Coincidentally (or not) Tesla battery supplier Panasonic said it plans to boost battery output for Tesla from the Nevada Gigafactory.
U.S.-made EV batteries also can earn up to $45/kWh in manufacturing tax credits under the IRA – a big reason why Ford and other automakers are racing to build battery factories in the United States. A 50 kWh battery pack could generate $2,250 in subsidies – more than the profit margins on many small cars.
Tesla has a commanding lead in harvesting U.S. tax-funded EV subsidies because it localized battery production and key links in its battery supply chain before the IRA was a gleam in President Joe Biden’s eyes. Morgan Stanley estimates IRA subsidies could add $47 billion to Tesla’s pre-tax profits through 2030.
The IRA’s battery subsidies have become a powerful gravitational force in the global auto industry – pulling investment in from other markets, and pushing European and Asian countries to offer subsidies of their own.
Benchmark Mineral Intelligence estimates IRA battery manufacturing subsidies could cost U.S. taxpayers as much as $150 billion through 2032. Consumer tax credits could total $220 billion, Benchmark estimated. Both figures are far more than U.S. budget watchdogs have estimated.
Will this be a political issue in the 2024 elections? No. It’s a political issue now.
Already there are signs that there are limits to Washington’s EV largesse. Reuters reported this morning that the White House will abandon a plan to allow Tesla and other EV manufacturers tap into a biofuels credit program.
