Tesla vehicle sales made a comeback last quarter. Will a lost EV tax credit end the rebound?

While analysts had expected Tesla to sell around 450,000 EVs over the three months ending in September, Tesla ended up delivering more than 497,000—about 100,000 more than the previous quarter, and a 7.5% increase from this time last year. Dan Ives, one of Tesla’s most notorious bulls, blasted out an analyst note that same morning, describing the numbers as a “massive bounceback” for Tesla—a turnaround for a company that has been battered over the first half of this year in several key markets as CEO Elon Musk tried his hand in a brief yet chaotic stint in American politics.

The key question is this: Will it last? 

After all, Tesla’s short-term sales surge was closely related to its looming longer-term challenge. One of the key reasons for Tesla’s strong sales figures, investors and analysts noted, was the temporary rush of consumers purchasing an EV right before the elimination of the $7,500 electric vehicle tax credit. That incentive—which officially ended on Tuesday—had been in place for 17 years and had helped narrow the price gap between electric and gas vehicles for U.S. buyers. Tesla on Wednesday went ahead and increased the cost of leasing its vehicles, as its first move reflecting the change.

With the tax credits no longer available, the change is expected to take a significant toll on consumer demand—at least in the near term. 

Tesla is well aware of this. It added risk disclosures in its latest quarterly filings about the potential impact of the loss of the consumer incentive as well as another now-non-existent sales booster, carbon offset incentives for manufacturers. The EV maker acknowledged the possibility that their removal could harm both demand from Tesla customers and the company’s future financial returns. 

Musk himself has opined on the topic, too. “Yeah, we probably could have a few rough quarters,” he said in July on Tesla’s last earnings call, in response to an analyst’s question. “I’m not saying we will, but we could. Q4, Q1, maybe Q2.”

Andrew Rocco, a stock strategist with Zacks Investment Research and an investor in Tesla shares, said in an interview that he’s anticipating a drop off in sales for the next two quarters or so. 

But the long-term impact may be contingent on several other factors: whether Tesla can absorb some of the lost credit in order to keep prices down; whether it can continue to regain market share in markets like Europe and China where its reputation has suffered over the last eight months; and whether the EV maker can deliver on the timelines it has furnished for a more-affordable Model Y.

“If they can come out with that cheaper model Y… That would be a huge catalyst to help them offset that EV tax credit sunsetting,” Rocco says.

Last time around

It’s worth doing a quick history lesson when considering how Tesla may respond to the elimination of the $7,500 tax credit. After all, this isn’t the first time it’s had to do so.

If you recall, when the incentive was first put in place via bipartisan legislation in the late 2000s, there was a cap: After a vehicle manufacturer sold a total of 200,000 eligible vehicles, the tax credit would slowly phase out until it was eliminated altogether. Both Tesla and General Motors ended up hitting that threshold, and their tax credits were halved twice before dissolving completely. The cap was removed under the Inflation Reduction Act of 2022, allowing Tesla and GM to take advantage of it again.

Back in 2018, Tesla sold 200,000 EVs, becoming the first EV maker to hit said cap. As a result, in January 2019, Tesla customers had their rebates cut in half to $3,750. To respond to the change, Tesla rolled out a $2,000 price cut for the Model S, Model X, and Model 3 the very next day, absorbing a large chunk of the lost incentive.

Because of Tesla’s strong margins, Rocco pointed out that Tesla could be in a position to do the same today if it chooses.

So far, Tesla hasn’t committed one way or another. The company has committed to releasing a lower-cost Tesla Y model later this year, however. Musk said that the new vehicle would be “available to everyone” before the end of 2025. 

That model has been rumored to cost somewhere around $39,990—which would be approximately $5,000 cheaper than the most affordable Model Y currently available. But there hasn’t been a firm price announcement. Rocco said that it will be “critical” for Tesla to meet Musk’s fourth-quarter deadline. 

Cost savings

It seems that all EV-makers are on the hunt for potential cost savings right now that they can ultimately pass down to the customer in lieu of the bygone tax credit. 

Chris Barman, CEO of Slate Auto, the startup that plans to start selling its low-cost customizable trucks to customers next year, told Fortune in an interview on Tuesday that there’s at least one upside to the loss of the tax credit. Because the company is no longer subject to all the supplier restrictions required under the Inflation Reduction Act to secure customers the tax credit, Slate has more options for battery suppliers that it can work with. “It would give us the opportunity to pass lower costs along to the consumer in a different way,” Barman said.

That being said, don’t expect those cost savings to add up to $7,500. While Barman wouldn’t provide a specific figure, she acknowledged, “It’ll be a significant cost reduction, but it won’t offset the full amount of credit itself.”

Another thing to keep in mind: There are still state-level incentives, too, as Barman pointed out—with the potential for more. A handful of states, including California, Colorado, Vermont, and Connecticut, currently offer their residents an EV tax credit. And states including Pennsylvania, Minnesota, and Texas are looking at incorporating their own incentives, too.

Tesla, meanwhile, is hoping that its impending autonomous capabilities will give the company an edge, even as its vehicles suddenly become more expensive for customers. Tesla is expected to roll out the 14th iteration of its “full self-driving” software shortly, and has already started doing so with select influencers this week.

“Once you get to autonomy at scale in the second half of next year, certainly by the end of next year, I think the—I would be surprised if Tesla’s economics are not very compelling,” Musk said during the Q2 earnings call.

Wall Street thus far doesn’t seem quite as optimistic. On Thursday, even after Tesla reported its strong sales figures, shares fell more than 5%.