Here’s How Tesla EVs Are Impacted By The Inflation Reduction Act In 2024

The year 2023 witnessed a significant jolt in the American electric vehicle (EV) landscape. The Inflation Reduction Act (IRA), a complex legislation, championed by the Biden administration, injected vital energy into the United States’ EV ambitions, aiming to accelerate adoption and bolster domestic manufacturing.

The IRA mandates that to qualify for the full $7,500 credit, EVs must source 40-percent of their critical minerals from the United States or a free trade partner, with this percentage escalating to 100-percent by 2029. Further, 50-percent of an EV’s battery components must be manufactured or assembled in North America, reaching 100-percent by 2029. These requirements were designed to reduce reliance on foreign, particularly Chinese, supply chains and create a robust domestic EV industry.

But where does Tesla stand amidst this electrified landscape in 2024? The short answer: in a nuanced position. For example, the Model 3 Performance and Model Y remain eligible for the full credit. However, the other siblings face a different fate. As of December 31, 2023, the popular and most affordable Tesla, the Model 3 Rear-Wheel Drive and Long Range variants, lost their credit eligibility. This loss represents a significant blow to Tesla, potentially impacting its sales and competitive edge.

In order to give you the most up-to-date and accurate information possible, the data used to compile this article was sourced from IRS, Consumer Reports, Fuel Economy, Inside Climate News, and other reliable sources.

Navigating The Maze Of Tax Credits

The Inflation Reduction Act (IRA) has significantly reshaped the landscape of federal EV tax credits, introducing a complex set of requirements aimed at accelerating the transition to clean transportation in the United States.

Navigating The Requirements

• Critical Mineral And Battery Component Provisions: To qualify for the full $7,500 credit, vehicles must meet both critical mineral and battery component requirements, specifying the percentage of materials sourced or processed domestically. Partial credits ($3,750) are available for meeting either requirement individually. These percentages become increasingly stringent from 2024 onwards, gradually demanding higher levels of domestic involvement.
• Income And Price Limitations: The credit phases out for individuals with adjusted gross incomes exceeding $150,000 and couples exceeding $300,000. Additionally, higher-priced vehicles (exceeding $80,000 for vans/SUVs/trucks and $55,000 for others) become ineligible. These limitations ensure targeted support for middle-class buyers and promote the purchase of more affordable EVs.
• Additional Eligibility Criteria: Vehicles must have a minimum battery capacity of 7 kilowatt hours, weigh less than 14,000 pounds, be made by a qualified manufacturer (except for FCVs), and undergo final assembly in North America. Sellers must also report necessary information to both the buyer and the IRS for the sale to qualify.

Transferable Tax Credit At Dealerships For Eligible Vehicles

Starting from January 1st, 2024, the U.S. taxpayers can transfer the credit to the dealer at the point of sale. This means that eligible dealerships would have the option to either reduce the cost of the vehicle by the corresponding credit amount or provide the consumer with a cash equivalent.

How The Inflation Reduction Act Impacts Tesla EVs In 2024

While the act offers potential benefits for EV adoption overall, its impact on Tesla’s lineup varies considerably across individual models.

Model S

• The Model S falls above the IRA’s $55,000 price cap for hatchbacks and sedans ($80,000 for vans, SUVs, and pickup trucks). This renders it ineligible for any federal tax credit throughout 2024 and beyond.

Model X

• The 2024 Model X Dual Motor is the only one from the Model X family that qualifies for the $7,500 credit in 2024.

Model 3

• Performance Trim Only: Only the sportier Model 3 Performance qualifies for the full $7,500 credit (which, by the way, isn’t available on the Highland update so far).
• Rear-Wheel Drive and Long Range Trims Lose Credit: The more affordable Standard Range and Long Range trims of the Model 3, previously eligible for half credit ($3,750) until December 31, 2023, are now completely ineligible for any tax credit starting January 1, 2024.

Model Y

• The Performance and All-Wheel Drive Model Ys produced in 2023 and 2024 qualify for the $7,500 credit. For the rear-wheel drive trim, only the 2024 version qualifies for the credit. As the IRA’s battery sourcing and manufacturing requirements become more stringent in the coming years, more versions of the Model Y might lose eligibility in the future.

Cybertruck

Overall, the IRA’s impact on Tesla’s lineup is mixed. While some models like the Model Y, Model X, and Cybertruck stand to benefit from the generous tax credits, others like the Model 3 and Model S face significant disadvantages.

A Market Poised for Growth But Still Climbing The Hill

While EV sales are steadily climbing, they haven’t quite reached cruising altitude. In 2023, despite exceeding 300,000 units for the first time ever, EVs still constitute a mere eight-percent of new car sales, lagging behind expectations.

Price drops (averaging $50,683 in September compared to $65,295 a year ago) haven’t fully bridged the affordability gap, as EVs remain roughly 28-percent more expensive than their ICE counterparts. Additionally, lingering anxieties about range and charging infrastructure cast long shadows, and backlogs at dealerships (82 days for EVs compared to 64 days for ICE) act as further deterrents.

A Boon Or A Bump In The Road

The IRA aims to be a potent accelerant for EV adoption, but its effects on Tesla’s trajectory are multifaceted. On the one hand, the extension of the $7,500 tax credit and its expansion to higher income brackets offer a potent boost to consumer demand. This could translate into increased sales for Tesla, particularly for its more affordable Model 3 and Model Y offerings.

However, the act also throws down the gauntlet with stricter domestic sourcing and battery requirements. While this strengthens the long-term resilience of the American EV supply chain, it could lead to short-term cost increases for Tesla, potentially dampening demand in the face of already present affordability concerns. Furthermore, potential production bottlenecks caused by the new regulations could exacerbate backlogs and frustrate eager buyers.

Increased Scrutiny On Battery Sourcing And Manufacturing

The IRA introduces stricter requirements for battery sourcing and manufacturing, kicking in starting in 2024. This presents both challenges and potential opportunities for Tesla. On the one hand, their current supply chain may not fully comply with these new regulations, potentially impacting their eligibility for the full tax credit.

However, on the other hand, Tesla’s existing battery production efforts in Nevada could position them well to adapt and leverage these requirements to their advantage in the long run.

Entrance Of The Used EV Tax Credit

The IRA also introduces a new tax credit for used EVs, potentially reducing the appeal of brand-new Teslas for some buyers. While this may not directly impact Tesla’s new car sales, it could indirectly affect their overall market share by making used EVs, including non-Tesla models, a more attractive option for budget-conscious consumers.

These factors, coupled with the gradual phasing out of the manufacturer sales cap, suggest that Tesla will face increased pressure on several fronts in 2024 and beyond.

• Adapt supply chains and battery components: To secure the full tax credit and maintain a competitive edge, Tesla will need to ensure batteries meet the IRA’s sourcing and manufacturing requirements. This may involve diversifying their supply chain, investing in domestic battery production, or exploring alternative battery technologies.
• Brace for heightened competition: With used EVs and other automakers now eligible for the tax credit for their compliant EVs, Tesla’s market dominance is likely to face new challenges. They will need to refine their pricing strategies, emphasize their unique selling points, and potentially consider expanding their product range to cater to a wider range of consumer needs.
• Navigate the evolving regulatory landscape: The IRA is just one piece of the puzzle in the ever-shifting landscape of EV regulations. Tesla will need to remain agile and adaptable to stay ahead of the curve and comply with new regulations as they emerge.