The new Tesla Model Y at a Tesla store and service center in North Hollywood.
EVs aren’t cheap. The only reason they’re accessible to many U.S. buyers is the $7,500 federal tax credit. What happens if that goes away?
EVs come at a premium
The average transaction price for electric cars was $55,544 in December 2024 versus $49,740 for gas-powered vehicles, according to a Kelley Blue Book report in January. Tesla had average transaction prices of $55,258. The federal tax credit, because of the size of the credit, can make the difference in closing the gap with gas cars. “It’s not the raw price that needs to be addressed. It’s the gap between a similar sized ICE (gas) vehicle and the electric version,” said Stephanie Brinley, an analyst at S&P Global Mobility, in a phone interview. ICE refers to internal combustion engine.
The credit is typically $7,500 for new vehicles and $4,000 for used EVs. For example, the new AWD Tesla Model Y launch edition is $59,990 without the credit and $52,490 with the credit. KKB added that with the new presidential administration, it’s “likely that EV incentives may change.”
Chance of $7,500 tax credit elimination increasing
A change to incentives increasingly appears to be the case. Though the tax credit cannot be eliminated with an executive order and requires an act of congress, there appears to be momentum. Recently two Republican senators proposed legislation that would eliminate the tax credit. In a Fox News interview Wednesday (February 18) with Elon Musk and President Trump, the President addressed the elimination of the credit saying that Elon Musk is “probably not that happy with it…But this was in the tax bill. They’re cutting back on the subsidies,” Trump said.
‘Unquestionably’ hurt EV growth
Without a hefty EV incentive, there’s no telling what could happen to EV sales. “If that goes away, I think without question that you will see the impact of that in the marketplace, in terms of the rate of growth at EVs. Unquestionably,” said Brian Irwin, Managing Director of Alvarez & Marsal’s Automotive & Industrials Group.
Irwin continued. “$7,500 is in the neighborhood of 15 percent. A 15 percent shift in transaction price is a big deal,” he said. “That 7,500 dollars for many consumers will play a factor in whether or not that vehicle remains affordable given.”
“If it goes away, all automakers are in the same position. It’s very likely to slow sales,” said Brinley. “We could see some automakers give some incentives to kind of counterbalance that,” she said.
Incentive is for automakers too
Sam Fiorani, an analyst at AutoForecast Solutions, believes the biggest benefit is to manufacturers. “Today, the tax credit is an incentive to make electric vehicles by boosting the revenue to automakers,” Fiorani said, adding that “EVs are here to stay. While this may be a bump along the road and may delay the eventual shift to zero-emission vehicles, the road is set.”
Musk on the elimination of the tax credit
Elon Musk has consistently downplayed the elimination of the federal EV tax credit, arguing that it would benefit Tesla in the long term while hurting competitors. In July 2024, during a Tesla earnings call, Musk stated that removing the $7,500 tax credit could be “slightly” bad for Tesla initially but “probably actually helps Tesla” over time.
