A new report indicates that Donald Trump’s transition team could be moving to eliminate a Biden-era tax credit on electric vehicles that became a landmark element of Democrat’s green agenda and a major boon for the EV industry.
These credits amounted to $7,500 each and were extended by the federal government to buyers who were willing to make the transition to electric-powered models.
This incentive was passed as part of the Inflation Reduction Act and covered both electric and hybrid vehicles. Experts consider it a key factor driving the adoption of EVs in the US market as it helped automakers make them more affordable.
Trump’s transition team, led by Harold Hamm, a billionaire from the oil and gas industry, and the billionaire Governor of North Dakota, Doug Burgum, have been reportedly discussing how to eliminate this credit as part of a far-reaching tax reform that will soon be presented by the incoming administration.
They believe that the new Republican majorities within both houses of the US Congress will rapidly approve the removal of this subsidy.
“Trump needs the cost savings from killing the credit to help pay for the extension of his trillions of dollars in tax cuts that are set to expire early in his term,” according to the Reuters report, citing two anonymous sources. The move, which would hurt American consumers who want to switch over to EVs, would mostly benefit the wealthiest Americans through these tax cuts.
This may be the first move from the Trump White House to start overturning some of the clean energy policies endorsed and promoted by the Biden administration but it won’t be the last. Trump believes that they hurt the country’s finances and produced little to no benefit to its economic growth. He has also repeatedly called climate change a “hoax”, despite the overwhelming evidence supporting the theory.
EV Market in the US Could be Severely Impacted by Trump’s Actions
Putting an end to this subsidy will no doubt have severe consequences on the EV market in America. Elevated financing costs have already strained its growth in the past few years and now consumers will not have any additional incentives whatsoever to shift from their gasoline-powered models.
Tesla (TSLA), the most successful EV manufacturer in the country, has benefitted tremendously from this tax credit in the past four years. However, representatives from the company have confirmed that they support its elimination.
Elon Musk, Tesla’s CEO and a major Trump backer, said earlier this year that losing the credit “might slightly hurt Tesla sales but would devastate its U.S. EV competitors.” This suggests that Tesla believes it can better withstand the impact of this move compared to other companies whose finances and business models are struggling. This is a classic move in the monopolist playbook, designed to force out struggling competition in order to take over the market and then raise prices significantly.
It remains to be seen whether cutting the credit would actually be a net benefit for Tesla but it’s devastating for other US EV makers either way.
Tesla is currently responsible for half the electric vehicles sold within US territory. However, its market share has been dropping since 2020 as rivals like GM and Ford have managed to bring to the market some popular electric-powered versions of their flagship models.
The Alliance for Automotive Innovation, a trade group that represents almost all companies that manufacture EVs, urged Congress to keep EV tax credits unchanged. They deemed these incentives “critical to cementing the US as a global leader in the future of automotive technology and manufacturing.”
The Trump transition team seems to be lining up several initiatives to roll back many of the Biden-era green policies. Trump repeatedly promised to end the seating President’s “EV mandate” but did not provide specifics on what exactly he will be targeting.
Moreover, all subsidies provided to the renewable energy industry are also on Trump’s radar, which includes wind and solar energy generation and hydrogen production. He considers them costly endeavors to the country and an unnecessary bias from the federal government as they benefit some industries over others. Ironically, removing them would dramatically benefit the oil and gas industry and potentially devastate renewable energy companies.
Trump seeks to boost domestic oil and gas production in the near term to make America less dependent on foreign sources.
Ending Subsidies May Benefit Tesla in the Long Run
The fact that Tesla representatives have expressed support for ending the EV tax credit may seem counterintuitive, given that the company has been its biggest beneficiary. However, Musk has previously argued that all government subsidies, including those for fossil fuels, should be phased out.
In a post on X (formerly Twitter), Musk stated: “End all government subsidies, including those for EVs, oil and gas.” He believes the EV market is mature enough to stand on its own without taxpayer support.
It’s important to note that Trump is (so far) only focusing on killing green energy subsidies. He has no plans to phase out any fossil fuel subsidies and even allegedly agreed to a quid pro quo deal with oil executives to cut regulations and corporate taxes in return for $1 billion in campaign donations.
With its dominant market position and manufacturing scale, Tesla may be better equipped to weather the financial impact of this decision than less established EV startups.
Meanwhile, legacy automakers who have been investing heavily in the electrification of their product line could be deterred by the absence of these incentives and could progressively scale back their ambitions – a move that would also benefit Tesla directly.
“While losing the EV tax credit could also hurt some demand on the margins in the US, this will enable Tesla to further fend off competition from Detroit as pricing/scale/scope is an apples to oranges when compared to the rest of the auto industry once the EV tax credit disappears,” said Dan Ives, a Wedbush analyst.
Tesla’s US Manufacturing Capacity is a Competitive Advantage
Tesla’s manufacturing capacity and technology give it an edge over smaller market participants. The firm has six factories in the country that produce both batteries and vehicles, which entitles them to receive certain tax benefits.
Meanwhile, its rivals have been struggling for years to scale up their production in America to receive these tax benefits and they have mostly relied on factories located in Mexico to do the job. They also need to balance their investments to cover both the demand for gasoline-powered vehicles and electric ones.
“That work has paid off, and many Tesla models are regularly named as the most ‘American-made’ compared to competitors, many of which rely on factories in Mexico,” the Reuters report noted.
Tesla’s CFO Vaibhav Taneja said during the company’s July earnings call that the company has taken advantage of these manufacturing credits. However, he also mentioned that the firm is constantly analyzing its situation in regard to the impact that these temporary benefits have on its operations.
“We always drive ourselves to say, OK, what if there is no IRA benefit? And how do we operate in that kind of an environment? Like Elon said, we definitely have a big advantage as compared to our competition on that front.”
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Tesla and Rivian Stock Drop After the News
The possibility that the Trump administration will get rid of tax credits seems to be concerning investors as the value of Tesla stock plummeted by nearly 6% on Thursday right after the report came out.
Meanwhile, shares of Rivian (RIVN), one of Tesla’s rivals in the US experienced a much more meaningful 14% drop as investors doubted the firm’s ability to keep growing their sales if these tax credits are off the table.
The loss of the credit could significantly impact consumer demand for electric vehicles in the near term, especially for mass-market models that rely on the incentive to offset their higher sticker prices.
This could slow do slow the country’s ongoing EV transition dramatically and give an advantage to Tesla alone.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
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