As automakers begin flooding the market with electric vehicles (EV) the next couple of years, a key question yet to be answered is just how much tax credits drive demand for a segment that makes up 1% of the new car market.
For Tesla and General Motors, the question is critical because both automakers are nearing the 200,000 sales mark at which point the $7,500 federal tax credit begins to wind down.
A year ago, Edmunds released an intriguing case study on how tax credits impacted EV sales in Georgia when the state ended a $5,000 tax credit for EV buyers July 2015. (It’s worth the read).
The study found that sales of high-end luxury EVs (mainly sales of Tesla S, which dipped slightly but rebounded later) were for the most part, immune, but sales of the more mainstream and affordable Nissan Leaf crashed.
Another recent example — although not in the U.S., but equally troubling — happened in Denmark when EV sales cratered from nearly 5,000 in 2016 to under 1,000 last year following the reintroduction of registration fees on EVs. Meanwhile, in Norway and Sweden, sales have increased as tax credits for buying an EV have expanded.
The results should create concern for automakers, many of whom are betting large investments on the belief consumers will finally start buying EVs.
One problem is that the average transaction price for a new electric vehicle was nearly $1,600 more than the price for an average new internal combustion engine (ICE) in 2017. Although, that number was down from $4,370 in 2016 ago according to Kelley Blue Book. So the gap is narrowing.
Nevertheless, all of the evidence shows tax subsidies drive EV sales, and when those credits go away, EV sales also go away.
Currently, all automakers EVs are eligible for the credit. Although, General Motors and Tesla, the two leaders in EV technology, are getting close to being ineligible — probably at some point this year.
(The U.S. Environmental Protection Agency provides a list of vehicles available for the federal tax credit, which can be viewed Here.)
In 2008, the federal government began granting tax credits of up to $7,500 to customers that purchase a qualified plug-in electric vehicle (PEV). Once an automaker hits 200,000 U.S. PEV sales, the tax credits begin a step-by-step 12 month wind down period.
A couple of key caveats: First, the full $7,500 is only available to people whose tax bill is $7,500 or higher. Otherwise, the credit will be for what the buyer owes in income tax that given year. Second, if the customer is leasing the vehicle, the credit goes to the automaker. It’s up to the automaker’s discretion whether to pass that savings onto the buyer.
A common misunderstanding is that when an automaker hits the 200,000 number, the $7,500 tax credit immediately stops. But it’s much more complicated. The government established a convoluted formula in which a wind down conceivably could take 18 months.
The wind-down begins during the second calendar quarter after the calendar quarter in which the automaker hits the magic 200,000 number. The full tax credit will still be available to customers for at least a full quarter or more after the 200,000th sale. It depends on the timing of that sale.
During the second calendar quarter, the wind down begins with a 50% ($3,750 tax credit will still be available) reduction in the tax credit for six months. And then another 50% reduction (or 25% of the original $7,500, meaning, $1,875 will still be available) for another six months. After that second six month period, the tax credit disappears entirely.
Based on that formula, it’s likely an automaker could sell significantly more EVs than 200,000 that qualify for the $7,500 credit. But that depends on the timing of when an automaker hits that number — which probably is creating a little bit of gamesmanship between Tesla and GM. (See their sales numbers below).
For example, if Tesla and/GM were to hit 200,000 sales in June, the $7,500 tax credit gets cut in half on October 1. But, if they sell their 200,000th vehicle on July 1, the credit remains in full until January 1, 2019.
It’s not a reach to say the first automaker to the 200,000 mark could win the battle but lose the early war in EV sales. Could GM and Tesla both be managing the sales cadence of their respective vehicles this year — the Bolt and the Model 3 — to maximize the potential sales created by the $7,500 credit? It makes sense.
Hitting the 200,000 mark too early could give the competitor more of a window to maximize the credit while your sales crater without it. Any sales momentum gained in 2017 and 2018 could be lost.
Interestingly, in Tesla’s first quarter earning’s call last year, Tesla chairman and CEO Elon Musk begged the federal government to end the PEV tax credits. Because the timing of the Model 3 launch and the aggressive sales timetable originally set by Tesla, analysts predicted it would be the first automaker to hit 200,000 U.S. sales — probably as early as the first quarter in 2018. And in an ironic twist, Musk apparently believed this could put Tesla at a disadvantage.
Tesla, at the very least, wanted to minimize the window of time in which Chevrolet Bolt customers would have access to the tax incentive when Model 3 buyers do not.
But it may be a moot point now. The current production problems plaguing Tesla’s launch of the Model 3 may ultimately work in its favor. As of the end of April, Tesla leads by approximately 6,000 (based on estimates — see below). It’s possible, the $7,500 credit could end at the same time for both automakers.
To slow U.S. sales for the next couple of months, Tesla could push Model 3 Canadian registrations.
Here are the overall qualifying PEV U.S. sales from 2009 to April 2018 for GM, Tesla and Nissan (GM and Tesla numbers are estimates due to the fact GM joined Tesla in April as being the only two automakers to not report monthly sales):
- General Motors (includes Volt, Bolt, Spark EV, Cadillac ELR and Cadillac CT6 PEHV): Estimated 178,373 (U.S. sales, not global)
- Tesla (includes Model S, Model X, Model 3 and an estimated 1,000 Roadster post 2009 sales): Estimated 184,500 (U.S. sales, not global — estimates for April are from InsideEVs.com)
- Nissan (Leaf): 118,524 (U.S. sales, not global) but factors in conversation and could be the ultimate winner going into the middle of 2019 because it already is competitively priced to the other two, who by then, would not have the $7,500 credit to drive sales.
- NOTE: Based on Wardsauto.com data and InsidedEVs.com Tesla estimates.
How sales respond next year for GM’s EV offerings and Tesla’s Model 3 will tell the industry whether there is cause for concern — especially if sales for vehicles such as the Nissan Leaf increase.
For more on Tesla’s strategy, see The Banks Report’s analysis from 2017 — Tesla’s Retail Model May be its Biggest Challenge.
(Originally published on LinkedIn).