Cheapest Tesla Model 3s to lose all tax credits

Analysts diverge on whether the US EV pure play has hit a foreseeable hurdle

Cheapest Tesla Model 3s to lose all tax credits
The previously most affordable Model 3s will take a hit from lost credits

Tesla has confirmed that its Model 3 rear wheel drive and long range BEVs, the two least expensive versions of the model, will lose their entire $7,500 consumer federal tax credit on starting next year.

This follows the company receiving guidance from the US Internal Revenue Service after the automaker initially announced that the two Model 3 versions would only lose eligibility for half of the tax credit amount.

“Unfortunately, the federal $7,500 EV tax credit will end entirely for Model 3 rear wheel drive and long range delivered after 31 December,” Tesla says.

There are currently two prongs to the available tax credit, each responsible for half of the maximum effective $7,500 consumer discount. Half is awarded for a battery’s components being made in a compliant country, and the other half for its critical minerals being sourced from a compliant country.

However, the Inflation Reduction Act (IRA) has always specified that, beginning in January 2024, no tax credit would be available for EVs with any component of its battery sourced from a ‘foreign entity of concern’, a stipulation which is now confirmed to include any battery firms with ties to China.

James Carter, principal consultant at Vision Mobility, believes Tesla should have anticipated this blow, calling it the automaker’s “big miscalculation.”

“It is well known that Model 3 batteries on entry models were sourced from China, exactly what the IRA was trying to lessen, and Tesla has been aware of this for some time,” Carter says.

“Model 3 will be quite uncompetitive in 2024, and I expect that this will cost them upwards of 50,000 units of sales in the US, which is huge,” Carter says. “For now at least, it looks like a strategic mistake.”


The consultant argues that Tesla has had various alternative options for its battery sourcing in the past few years which could have saved it from needing to rely on a now problematic supply chain. But some are less sure that any alternative battery sourcing options were ever viable for Musk’s firm.

Tesla’s 4680 cell is ramping up slowly in its factories in Texas, California, and Nevada, while Carter also suggests that Tesla could have “set up a new plant for LFP or even buy from a local LFP supplier with capacity”.

But both these suggested solutions have problems. The 4680 cell has not reached the required scale, with Tesla CEO Elon Musk confirming that — while at the end of Q3 the company’s Texas gigafactory had produced its 20 millionth cell —production remains nascent, as Tesla continues to work through flattening the cost curve and reducing wastage.

“Texas is now our primary 4680 facility. We are heavily focused on quality. Scrap is down 40pc quarter-over-quarter, with increased volume and yield improvements,” Musk said in October. “Phase 2 of the Texas 4680 facility is currently under construction. The additional four lines incorporate further capital efficiencies over Phase 1, and our target is for them to start producing in late 2024.”

Tesla has also previously indicated that it intends to use 4680 cells for battery energy storage ahead of automotive applications.

The firm could alternatively look to source LFP batteries from a local supplier, but LFP projects in the US which are sure to be IRA-compliant are in their early stages of ramp up. US battery firm ONE, for example, announced a 20GW battery plant in Michigan in late 2022 but only began production of its first LFP cells in November this year.

Israeli firm ICL's LFP cathode factory in Missouri, expected to be the first large-scale LFP facility in the US, is due to begin production in 2025. And Utah-based firm the American Battery Factory' s Tucson, AZ LFP gigafactory has an expected start date of 2026.

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“Counter to what people seem to think, there are currently no automotive volume LFP plants in North America,” says Ken Zemach, battery cell expert at Evergreen Technology Consulting.

“The assumption that it was a miscalculation not to source local LFP is misinformed. From planning to D sample [pilot] production is a four-ish year process — three if you have secured the land and have a factory and cell design already qualified, which only China has for LFP,” he continues.

“Remember, the entire IRA is not that old.” Zemach suggests that Tesla’s predicament “is not a miscalculation — it is a consequence of the state of US manufacturing”.

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