On Aug. 16, 2022, President Joe Biden signed the Inflation Reduction Act (IRA) into law. Although there are many components to the IRA, one of the more prevalent 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 help make EVs more affordable while also creating a more green, sustainable environment.
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However, throughout his campaign President-elect Trump suggested that he may try to remove these EV incentives. On the surface, such a move may seem detrimental to a company such as Tesla(NASDAQ: TSLA) — the de facto poster child for EV manufacturing in America.
While I understand the reasoning behind this logic, my contrarian prediction is that Tesla will actually benefit from the removal of EV tax credits — should President-elect Trump actually pursue this ambition successfully.
Below, I’ll dive into how removing subsidies could impact the EV market and explain why I think Tesla will be just fine in the long run.
Generally speaking, EV adoption is still in its early days. There are only a finite number of companies that are solely focusing on building EVs, such as Tesla and Rivian. Meanwhile, legacy automakers like Ford and General Motors are still very much affiliated with traditional combustion engine cars despite each investing billions into their respective EV roadmap.
The small competitive landscape, coupled with the fact that none of these automakers has achieved mass production — say tens of millions annually — has contributed to high prices in the EV market. For these reasons, EVs are simply out of reach for most consumers — hence, the Biden-Harris administration took action in the form of tax credits to help offset these hefty costs.
Removing subsidies from EVs 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 permeate throughout the entire EV landscape, I see Tesla as far less vulnerable than its peers. Remember, Tesla is already perceived as a premium product. In other words, owning a Tesla is still somewhat of luxury and not exactly a purchase the average consumer can yet afford. For this reason, I don’t think a drop in broader EV demand would make too much of a dent in Tesla’s growth.
By contrast, removing EV tax credits would almost certainly be a big blow for smaller players or legacy incumbents such as Ford and GM, which may rely more on subsidies to entice consumers to try out their alternatives to Tesla’s vehicles. In other words, Tesla’s competitors primarily compete with the company on price and not the quality of the product. If EV tax subsidies go away, the competition loses part of its value proposition.
Taking this a step further, getting rid of tax credits could be a major barrier preventing new competitors from entering the EV space at all. As I alluded to above, manufacturing EVs and battery technology is still incredibly expensive — even for major forces such as Tesla. Smaller competitors simply do not have the financial flexibility to absorb these costs.
Without the help of tax credits and the demand they spur for EV purchases, smaller players will remain at a disadvantage — thereby allowing Tesla to further penetrate the market and build momentum.
It’s important to note that much of what I wrote above is rooted in theory. Said another way, removing tax credits should be more of a problem for newer EV makers and less so for Tesla. But of course, I do not know if my prediction will actually hold up if President-elect Trump indeed gets rid of these incentives.
Nevertheless, don’t just take my word for it. Check out Tesla CEO Elon Musk’s opinion of the Inflation Reduction Act and EV tax credits in the video below:
I am aligned with Musk’s outlook that the subsidies from the IRA ultimately serve as more useful for smaller EV competitors and not so much Tesla. At the end of the day, I remain optimistic on Tesla’s future and am not worried about the company’s ability to succeed — regardless of the EV tax credits.
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Adam Spatacco has positions in Tesla. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.
