Published on July 5th, 2018 | by Loren McDonald0
Relax, Most Tesla Model 3 US Reservation Holders Will Still Benefit From US Federal EV Tax Credit
July 5th, 2018 by Loren McDonald
The interweb was on fire on Monday July 2 about the possibility that Tesla actually delivered its 200,000th EV in the US in June.
US Model 3 reservation holders freaked out and Tesla haters and shorters saw it as another sign that the end of the Tesla was near.
Everyone take a deep breath — most US Model 3 reservation holders will still be able to benefit from at least some level of the federal EV tax credit.
Most observers assumed that Tesla was actively managing their vehicle deliveries (especially of the Model 3) explicitly to avoid hitting the federal tax credit milestone in June so as to delay the beginning of the credit phaseout until Q3 rather than Q2. (For example, it was expected that Tesla was avoiding the milestone by shipping to Canada and/or holding cars for delivery in July.)
But our friends over at InsideEVs wrote an article suggesting that Tesla delivered enough cars in the US in June to easily pass the 200K mark — and Twitterverse went crazy.
Tesla has of course been mum on the status of its 200,000th US delivery. The Internal Revenue Service (IRS) has also not provided an update on the number of Teslas sold historically in the US, let alone through Q1 or Q2. So, for now, we must continue to speculate — did the company pass the 200,000 milestone in June or not?
It should also be noted that GM will be next to hit the 200,000 EV sales milestone, which I estimate to happen in January (Q1) 2019. (I’ll have an upcoming article on why I think sales of GM’s EVs will actually be more negatively affected than Tesla’s with the phaseout of the tax credit.)
What Does Reaching 200,000 Mean to US Model 3 Reservation Holders?
So, if Tesla did indeed deliver its 200,000th EV in the US in June (Q2), what does it mean for US model 3 reservation holders? In my December 2017 CleanTechnica article, “330,000 Tesla Model 3 US Reservation Holders (Buyers) Could Take Advantage of the Federal EV Tax Credit,” I included a few scenarios that suggested that from a low of nearly 85,000 to as many as 330,000 US reservation holders could benefit from the tax credit.
(As a reminder, see chart below showing how the tax credit phase out works.)
Because of Tesla’s production hell, the company didn’t produce and deliver in the first half of 2018 as many Model 3s as many had hoped. But now we have a better, albeit still uncertain, lens into production and delivery volume going forward.
I’ve updated my chart from last year with 3 new US delivery scenarios of 3,500, 4,000 and 4,500 Model 3s per week beginning in Q3 of 2018. My assumption is that while Tesla has achieved a production rate of 5,000 Model 3s at the end of June, the company has yet to prove that it can maintain this rate, and it will likely take well into Q3 to consistently produce 5,000 Model 3s per week.
My scenarios also assume that roughly 20% or so of Model 3s produced each month will be delivered to non-US markets. This will likely vary widely over the next few years, but for the sake of simplicity in the scenarios, I’m assuming a consistent volume level will be delivered outside of the US.
If any of the 3 scenarios end up being close to what actually happens over the next 5 quarters, then just about every (200,000–250,000) US Model 3 reservation holder will still have access to one of the three levels of the tax credit. While we don’t know precisely how the reservation holders break down by country, a reasonable assumption is that half to as high as two-thirds are in the US — roughly, the amount of forecasted available tax credits. (Last December, the now defunct Model3Tracker site estimated 223,319 Model 3 reservations from US residents.)
But, yes, reaching the 200,000 sales milestone a quarter earlier than many expected, which on the other hand was 1–2 quarters later than originally estimated, could have a modest effect on an estimated 120,000 Model 3 buyers.
Around 40,000 fewer reservation holders will be able to benefit from the full $7,500 tax credit, but they would still have the next lower credit of $3,750 available. Another 40,000 or so would benefit from the $1,875 credit level instead of $3,750. And another 40,000 +/- would lose out on the lowest credit amount of $1,875.
And, yes, if you get out your calculator, that means that hitting the 200,000 US sales milestone in Q2 instead of Q3 means that US reservation holders may miss out on about $525 million worth of tax credits. Good for the IRS, less so for Model 3 buyers. However, keep in mind that if Tesla had been able to ramp up production as originally hoped late in 2017, then they would have hit the 200K milestone in either Q1 or Q2 anyway. But how quickly we forget.
While triggering the phaseout 3 months earlier than many expected will have an impact on some reservation holders, I believe it will have a negligible impact on sales. Unlike buyers of EVs from non-luxury brands like Kia or Chevrolet, buyers of models from Tesla are not motivated primarily by price. (I’ll delve into this in detail in a future article.)
And after all of this, if Tesla actually did not reach the 200K milestone in June, then you may go back to your regularly scheduled Tesla debate.
Tax Credit Reminders
There is a lot of confusion among consumers about how the tax credit works and doesn’t work. Here are a few reminders with a particular lens toward Model 3 buyers:
¤ The federal EV tax credit is just that, a tax credit that is applied to your tax liability. While almost all of the auto manufacturers (including Tesla) like to convey that the tax credit reduces the sales price of an EV, it doesn’t.
¤ If you purchase a Model 3 or any EV with cash or a bank loan, you still must pay full price for the vehicle. If you purchase an EV via lease financing, the lessor typically applies the federal credit amount against the cost of the vehicle and reduces monthly payments accordingly (or accounts for it in some other financial gymnastics way). At this time, however, Tesla is not offering lease financing for the Model 3, so zero buyers will see lower payments of the Model 3 until Tesla offers a lease option.
¤ The IRS does not send you a check for $7,500 (or $3,750 or $1,875) after you file your taxes the following year after your EV purchase. If you qualify for the credit, your tax liability is reduced by the credit amount, which would either increase your refund or just lower your amount of taxes due. However, the credit does not go beyond your total tax liability. As Steve Hanley wrote, “For example, if you purchase a car that is eligible for the full $7,500 credit but you only owe $3,897 in federal tax, the total benefit you will get from the law is $3,897, not $7,500.”
¤ Consumers obviously may choose to use that tax credit amount however they want — to help pay future car payments, to pay down credit card debt, as savings or for investments, to pay for a family vacation, or to remodel a bathroom. (BTW, I’d love to see research on how EV buyers are actually using the federal EV tax credits.)
Don’t Forget the Available State and Utility Incentives
I have no data to prove my theory, but I believe that a large percentage of Model 3 reservation holders who incorrectly thought they were going to drive away from the Fremont factory or a Tesla service center in a Model 3 costing only $27,500 ($35,000 minus $7,500) also didn’t factor in available state and utility incentives, somewhat correcting for the misunderstanding regarding the tax credit.
So, while some reservation holders may now benefit from a lower federal tax credit amount or none at all, they also may be able to make up the difference (or more) by taking advantage of the many state and utility incentives (see list of available EV incentives here). And many of these are actual rebates, not credits. In California, for example, where more than 50% of the Model 3s will likely be purchased, residents can take advantage of a $2,500 state rebate and various utility rebates, typically of around $500.
New Legislation to Extend the Federal Tax Credit
A final note: Rep. Peter Welch (D-VT) has introduced a bill to eliminate the per manufacturer cap and make the credit available to an unlimited number of EV buyers for the next 10 years. The proposed bill seems to overreach in some areas, but if a modified version is eventually passed by Congress, then all of this hysteria about which quarter Tesla reached the 200,000 sales milestone will soon be forgotten.