On August 16, 2022, President Joe Biden signed the Inflation Reduction Act (IRA) into law. While the IRA has many components, one of the most common aspects of this piece of legislation revolves around tax credits for electric vehicles (EVs).
Simply put, consumers who purchase a new EV are eligible for a tax credit worth up to $7,500, while used EV purchases are eligible for a credit of up to $4,000. One of the driving forces behind these incentives is to make electric vehicles more affordable while creating a greener, more sustainable environment.
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However, during his campaign, President-elect Trump suggested he might try to remove these EV incentives. At first glance, such a move seems detrimental to a company like Tesla(NASDAQ: TSLA) — the de facto poster child for EV production in America.
While I understand the reasoning behind this logic, my contrarian prediction is that Tesla will actually benefit from the elimination of electric vehicle tax credits – should newly elected President Trump actually successfully pursue this ambition.
Below I will discuss the consequences of eliminating subsidies for the EV market in more detail and explain why I think Tesla will do just fine in the long term.
Overall, electric vehicle adoption is still in its infancy. There are only a finite number of companies focused solely on building electric vehicles, like Tesla Rivaans. Meanwhile, older automakers love it Ford And General engines are still strongly tied to traditional combustion engine cars, despite each investing billions in their respective EV roadmap.
The small competitive landscape, coupled with the fact that none of these automakers have achieved mass production – say tens of millions per year – has contributed to the high prices in the EV market. For these reasons, electric cars are simply out of reach for most consumers — which is why the Biden-Harris administration took action in the form of tax credits to help offset these high costs.
Removing subsidies on electric vehicles would make these purchases more expensive. In turn, the EV market could very well witness a sharp decline in consumer demand.
Image source: Getty Images.
While a drop in demand would likely ripple across the EV landscape, I view Tesla as far less vulnerable than its peers. Remember, Tesla is already seen as a premium product. In other words, owning a Tesla is still something of a luxury and not exactly a purchase that the average consumer can afford anymore. For this reason, I don’t think a decline in broader demand for electric vehicles would hurt Tesla’s growth too much.
In contrast, eliminating EV tax credits would almost certainly be a big blow to smaller players or incumbents like Ford and GM, who may be more reliant on subsidies to entice consumers to try out their alternatives to Tesla’s vehicles. In other words, Tesla’s competitors compete with the company primarily on price and not on the quality of the product. If tax subsidies for electric vehicles disappear, the competition will lose part of its value proposition.
Taking it a step further, the elimination of tax breaks could be a major barrier that prevents new competitors from entering the EV market in the first place. As I mentioned above, production of electric vehicles and battery technology is still incredibly expensive, even for major powers like Tesla. Smaller competitors simply do not have the financial flexibility to absorb these costs.
Without the help of tax credits and the demand they drive for EV purchases, smaller players will remain at a disadvantage – allowing Tesla to further penetrate the market and build momentum.
It is important to note that much of what I wrote above is based on theory. Put another way, eliminating tax credits should be more of an issue for newer EV makers and less of an issue for Tesla. But of course I don’t know whether my prediction will actually hold if newly-elected President Trump does indeed get rid of these incentives.
Don’t just take my word for it, though. Watch Tesla CEO Elon Musk’s thoughts on the Inflation Reduction Act and EV tax credits in the video below:
I agree with Musk’s view that the IRA subsidies are ultimately more useful to smaller EV competitors and not so much to Tesla. Ultimately, I remain optimistic about Tesla’s future and have no concerns about the company’s success – regardless of EV tax credits.
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Adam Spatacco has positions in Tesla. The Motley Fool holds and recommends positions in Tesla. The Motley Fool recommends General Motors and recommends the following options: In January 2025, $25 would appeal to General Motors. The Motley Fool has a disclosure policy.
Prediction: President-elect Donald Trump’s plan to revoke electric vehicle tax credits will help Tesla was originally published by The Motley Fool
