Key Takeaways
1. Federal Tax Credit Changes: Proposed legislation may eliminate federal tax credits for electric vehicles starting in 2026, affecting both new and used EV buyers.
2. Tesla’s Ineligibility: Tesla will not qualify for future federal subsidies due to its high sales volume, impacting pricing and demand for the Model Y.
3. Increased Costs for Buyers: The removal of tax credits could lead to significant increases in monthly payments for Model Y buyers, with estimates of over $100 to $150 more per month.
4. Impact on Demand: Without federal tax credits, Tesla may face challenges in maintaining demand for its vehicles, including the Model Y and Cybertruck.
5. Musk’s Outlook: Elon Musk believes the loss of tax incentives may favor Tesla long-term, but current declines in demand could test this view.
Tesla might see a surge in Model Y sales later this year, as the options to use federal tax credits for down payments or to lower leasing costs could be ending in 2026.
Changes in Tax Credits
The Republican “One Big, Beautiful Bill” tax proposal aims to eliminate the clean energy credits and tax incentives that were part of the Biden administration’s Inflation Reduction Act. This new GOP legislation would reduce some of the tax cuts from Trump’s first term, but it would also cut the federal tax credit for both new and used electric vehicles.
Starting in 2026, there will be no $4,000 discounts available for used electric cars, and the $7,500 tax credit for new EV buyers will only apply to manufacturers that have sold fewer than 200,000 vehicles to date.
Tesla’s Situation
Tesla will not be eligible for the 2026 federal subsidy, given that it is currently the second-largest EV producer globally, just behind BYD, and sells more vehicles than any other electric car maker in the US. So, from January 1, 2026, the new Model Y will not qualify for the $7,500 federal tax credit that it currently benefits from.
Furthermore, the government plans to remove the $7,500 tax credit for commercial electric vehicles to help fund the extension of the 2017 tax cuts. This change could significantly affect Model Y buyers, as most electric vehicles in the US are leased. If the bill passes, automakers and dealers will need to charge the full MSRP after December 31 instead of passing the commercial EV tax credit to the buyer.
Pricing Impact
Currently priced at $44,990 for the base model, this change could lead to over a $100 increase in the monthly payment for the RWD Model Y. The difference in monthly payments for the Model Y AWD, which currently has an attractive APR financing deal, is expected to be around $150 more.
As a result, Tesla may struggle with demand since none of its vehicles will be eligible for the federal tax credit in the coming year. Even the Cybertruck, which has sales lower than the 200,000 unit limit right now, will not qualify because the bill considers the manufacturer’s total sales.
The government has been spending around $200 million each month to subsidize the price of the Tesla Model Y and other electric vehicles from different manufacturers, but these subsidies may be ending in 2026.
Musk’s Response
Back in November, Elon Musk downplayed the potential loss of EV tax incentives, suggesting it wouldn’t heavily impact Tesla. He remarked, “I guess that there would be some impact, but I think it would be devastating for our competitors.” Musk also mentioned that “long term, this probably actually helps Tesla,” but with the current decline in demand for Tesla vehicles, this assertion may soon be tested.
To cope with the removal of the federal tax credit, Tesla might need to reduce prices, introduce new models like a rumored cheaper and smaller Model Y, or brace for the expected drop in demand due to the early elimination of these tax credits.
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