The coveted $7,500 federal tax credit for purchasing a new electric vehicle will be cut in half for Tesla buyers starting January 1, 2023, unless lawmakers take action to extend it. Tesla has warned customers on its website that they must take delivery by December 31 to guarantee the full tax incentive amount.

This sudden reduction casts doubt on the future of EV credits just a year after the policy was expanded under the Inflation Reduction Act. The loss of the full tax break coincides with sliding EV sales and puts pressure on manufacturers like Tesla to offer additional discounts to stimulate demand.

Tesla Slashes Prices Amid Slowing Sales

In recent months, Tesla has reduced prices across its lineup of electric cars in the face of softening sales. In October, the company cut prices on its top-selling Model 3 by up to $2,250. The Model Y also saw reductions of $2,000 on certain configurations.

Along with trimming new vehicle prices, Tesla lowered the monthly lease rates for the Model 3 from $419 to $329 per month. The Model Y lease dropped from $499 to $399 monthly. Leasing makes up a small portion of Tesla’s business, around 5% in Q2 2022.

These moves aim to shore up sales amid rising concerns over inflation and a potential recession dampening consumer appetite for big-ticket purchases like cars. New vehicle sales industry-wide have slowed in 2022. Tesla delivered over 936,000 vehicles globally in the first three quarters of 2022, up 44% year-over-year but below its 50% annual growth target.

$7,500 Credit Halved Starting January 1

The $7,500 “Clean Vehicle Credit” initially passed under the Inflation Reduction Act was intended to accelerate EV adoption in the U.S. It boosted the previous $4,000 maximum credit to $7,500 for new EVs purchased after August 16, 2022. The incentive applies at the point of sale directly reducing an EV’s price tag.

But the program contains a phase-out provision that kicks in once an automaker sells 200,000 qualifying EVs. Tesla and GM both hit this threshold long ago, triggering a gradual phase-down of the credits over time.

For Tesla, the credit drops to $3,750 on January 1, 2023 before falling again to $1,875 on July 1 and disappearing completely by the end of 2023. This means buyers who want the maximum $7,500 credit have only until the new year before it is halved.

The phase-out schedule for GM is on a slower timeline given their later date crossing the 200,000 unit threshold. But GM buyers will also see credits reduced in 2023 if no legislative action is taken.

Future of EV Tax Credits Uncertain

The looming expiration of the full $7,500 credit adds uncertainty for EV shoppers and manufacturers. Tesla and others were hopeful the recently passed Inflation Reduction Act with its boosted incentives signaled a long-term commitment to promoting EV adoption.

Now doubts have emerged about the government’s willingness to sustain the policy beyond a short term stimulus. Tesla claims “the credit is at risk of being canceled” on its website.

Some industry advocates argue the 200,000 vehicle cap should be lifted to allow established automakers to continue benefitting from the maximum credit amount. Bipartisan legislation introduced in September proposes removing the cap and extending the credits until 2032.

But the bill faces substantial hurdles to passage in the divided Congress. Absent legislative action, credits will start phasing down rapidly in 2023 — an outcome that could weaken EV demand as prices rise.

Automakers Forced to Offer More Discounts

The looming reduction puts more pressure on automakers to offer additional incentives beyond the tax credit to attract buyers. With credits falling, manufacturers will likely have to absorb the loss by discounting vehicles further.

Many companies are hesitant to lower prices too far given thin profit margins on EVs currently. But limited-time sales and special offers may become more commonplace to drive volume, even at the expense of near-term profits.

GM has already boosted discounts on the Chevy Bolt to up to $6,300 in regions seeing slow sales. One-time “courtesy cash” offers are another way brands can incentivize dealers and consumers without impacting sticker prices long-term.

Some industry watchers caution EV prices may be due for a market correction regardless of credits as supply catches up with demand. Lower prices combined with reduced tax incentives could squeeze profitability across the sector. But falling costs are needed to achieve mass adoption in the long run.

Consumers advised to consider current offers

For consumers in the market for a new EV like a Tesla Model 3 or Model Y in late 2022, experts recommend taking advantage of current incentives before they are curtailed. Taking delivery by the end of this year guarantees the full $7,500 credit for eligible vehicles — potentially thousands in savings.

Shoppers are advised to factor in all available discounts, including limited-time sales and state/local incentives where applicable. Costs of home charger installation and other ownership expenses should be weighed against tax savings when deciding on an EV purchase as well.

While the outlook for EV credits is mixed heading into 2023, reduced costs and more model availability continue driving record sales. Nearly 200 new EV models are expected by 2025. Although credits may fall, ongoing innovation and economies of scale will ultimately accelerate mainstream adoption. Consumers still have many compelling reasons to go electric.

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