Markets

Could Tesla Get a Boost From a New Electric-Vehicle Tax Credit?

Shares of electric-car company Tesla (NASDAQ: TSLA) traded higher on Wednesday, rising 1.4%. The stock's gain follows a report from Reuters that a bipartisan group of U.S. lawmakers introduced legislation this week to improve the tax credit for electric vehicles. The current credit begins phasing out after a manufacturer sells 200,000 qualifying vehicles. A new credit, however, would significantly expand this limit.

Obviously, since every vehicle Tesla produces is fully electric, the bill could be both a significant and material demand driver for the automaker.

A woman unlocks her Model 3 with a Tesla app on her smartphone

Model 3. Image source: Tesla.

Meet the Driving America Forward Act

The new bill, which is called the Driving America Forward Act, proposes granting automakers 400,000 additional qualifying electric vehicle sales on top of the first 200,000 that already qualify for a $7,500 tax credit, which go to buyers of the vehicles. For the additional 400,000 vehicles, the bill would allow buyers to earn a $7,000 tax credit.

The new bill, however, would have a shorter phase-out period, sunsetting over a nine-month period after a manufacturer sells an additional 400,000 vehicles on top of the 200,000 that qualified for the current tax credit. That compares with the current credit's 15-month phase-out period after a manufacturer sells its 200,000th electric vehicle.

The new bill is "sponsored by Democratic Sens. Debbie Stabenow and Gary Peters, Republican Sens. Lamar Alexander and Susan Collins, and Democratic Rep. Dan Kildee," Reuters said.

The bill would cost about $11.4 billion, with the bulk of it going to the proposed electric-vehicle tax credit.

A timely catalyst

If this bill passes, it could provide a timely lift to demand for Tesla vehicles.

The company's most recent deliveries fell short of expectations as demand for the automaker's pricier Model S and X seems to have taken a hit amid the phase-out of the current tax credit for Tesla. Management predicted in its fourth-quarter update that it "likely saw a pull-forward of demand in the U.S. for Model S and Model X into 2018" as a result of the credit's Jan. 1 reduction. On Jan. 1, the tax credit for buyers of Tesla vehicles was cut in half to $3,750, as the automaker recently crossed the 200,000 cumulative electric vehicle sales threshold. But deliveries of the two vehicles were much lower than Tesla had guided for, suggesting demand suffered significantly.

An expanded electric-vehicle tax credit could also help spur demand for Tesla's lower-cost, higher volume Model 3, just as the company is ramping up the vehicle's production.

The existing credit is scheduled to fall to $1,875 in July and be eliminated entirely by the end of the year for Tesla buyers.

The proposed new electric-vehicle tax credit will be attached to tax legislation for consideration within the next couple of months, supporters hope. Of course, the bill could see intense opposition. Indeed, the Trump administration's recent 2020 budget proposal advised ending the electric-vehicle tax credit entirely, saving the U.S. government an estimated $2.5 billion over a decade.

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Daniel Sparks owns shares of Tesla. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.

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