Tesla Model 3 Buyers Will Flee Faster than Electrons When Electric Vehicle Tax Breaks End

Count on it: Elon Musk will be on the hook for $200 million in refunds—to at least 200,000 Model 3 depositors—when EV dreams meet price-hike reality.

Just another crazy month in Washington, D.C. The U.S. House of Representatives floats a tax proposal that would wipe away the $7,500 federal tax credit for electric cars beginning December 31. Automakers and environmentalists cry foul. The Senate, introducing its own tax-reform scheme on Thursday, decides to retain the credit. Automakers and environmentalists cry “bravo.” 

But the truth lurks behind the C-Span broadcast: Whatever Congress decides, the clock is ticking on EV credits regardless. And if that clock isn’t restarted, you can bet your bottom dollar—or, rather, $7,500 of them: EV sales are going to tank, badly, and even Tesla’s electric magic will be powerless to stop a sales blackout.

Really, this should be obvious: If you believe that the consumer looking to spend $27,500 on a car will happily pay $35,000 instead, then you’ve never in your life shopped for a $27,500 car. Yes, I’m talking about a starter-version Tesla Model 3 with its 220-mile range. But the same truth applies to pricier Model 3s, or the Chevrolet Bolt, whose palatable $29,995 after-rebate base price will leave shoppers seeking Heimlich Maneuvers once it soars to $37,495. Such budget-busting price jumps—it’s 25 percent, for chrissakes—will kill mainstream EV sales like Raid kills bugs: Dead.

This spring, Tesla—followed shortly by General Motors and then Nissan—should reach the government’s magic number of 200,000 registrations of qualified EVs and plug-in hybrids. At that point, the taxpayer-sponsored free lunch begins to vanish. Within six months of hitting the threshold, Tesla, Chevy Bolt, and Nissan Leaf buyers will see the $7,500 tax break shrink to $3,750. Six months later, it’s halved again, to $1,875. By roughly fall 2019, it goes away entirely for Tesla, with GM and Nissan likely just behind. Manufacturers that haven’t reached the 200,000 sales cutoff—including Ford, Volkswagen, BMW, Audi, Fiat Chrysler and Hyundai—will sail on with full tax breaks. Some EV buyers will fall into their lower-priced laps, their weird reward for being either late or poorly prepared for the electric party.

That will leave Tesla shoppers, already forced to wait patiently in a 500,000-strong reservation line, facing a de facto $7,500 upcharge for the rocketing amusement park ride known as the Model 3. A hefty percentage of those buyers will get cold feet and use them to flee, especially because a prudent retreat costs them nothing. Their deposits—a glorified handraiser, really, with a few mouse clicks thrown in—are fully refundable. Like the plaid-jacketed Detroit salesmen that Tesla fans love to bitch about, Tesla dealers are steering (in some cases, strong-arming) impatient prospects into Model S and X vehicles, which will slurp up many of the remaining discounts as Tesla struggles to boost Model 3 production. Many Model 3 reservists insist they’ll buy the car even if they don’t sneak under the discount wire, but I’m convinced that such theoretical bravado is bound to dissipate.

Elon Musk had best fill his wallet now, because in my estimate, he’ll need to empty it by at least $200 million: That’s 200,000 people saying, “Elon, begone,” and asking for their $1,000 deposit back, with varying degrees of niceness. Put another way: Of the roughly 500,000 names on the current reservation list, I’m predicting that at least 40 percent will never close the deal, due to soaring prices or simple impatience with a wait that could stretch to two years, minimum. (I actually think the dropout rate may exceed 50 percent, but I’m playing this one conservatively). 

If you’d care to argue the numbers, let’s just wait until fall 2019: As a big EV fan, I’ll be happy to eat electric crow if I’m wrong. But I’ve covered this business long enough, and learned enough about buyer psychology, to be confident that I’m right.

Let’s dissect some arguments for those betting the other way. The conventional wisdom, which Tesla, General Motors, and others have gladly promoted, is that EV buyers are so different, so special, that they barely even have a budget. Granted, the Model 3—if Elon Musk can get his barely-moving factory running at anything like Toyota speed—seems more immune to a price hike than any rival, for several reasons: It’s faster and better looking, more technically proficient, and is surfing a tsunami of unmatched brand cachet and goodwill. Its buyer base includes people who’ve already paid far more for a Tesla Model S or Model X, along with people who drive conventional luxury cars and are dying to switch to a Model 3. 

It’s also true that plug-in buyers as a group have tended to be wealthier than their strictly-gasoline counterparts. While the sample size was small, Ford claimed that the median Focus EV household enjoyed a remarkable $199,000 in annual income, versus just $77,000 for buyers of the standard Focus. TrueCar.com tells us that median Bolt households earned earned just over $110,000 in  in 2016 and 2017. Yet in a nation in which conventional cars, despite generous federal and state incentives for plug-ins, continue to hold 99 freaking percent of the American new car market, it’s naïve to believe that even the Model 3 is immune from pricing pressures and market forces. EV makers suggest the opposite with some sleight-of-hand, saying that these high-income buyers could easily afford a more-expensive car. The logical fallacy is clear: Just because someone “could” afford something, doesn’t mean they’ll buy it. 

In reality, the pitfall for EV sales is cold and deep: Consumers will soon be asked to pay full retail price for something that was previously on sale, and has never not been on sale. American consumers just don’t do that. 

To understand why, look to buyer psychology. Even for many people who “could” afford to pay cash for a Model 3, losing out on a $7,500 discount—or even the lesser $3,750—will instantly sour the deal. It’s like being 10 minutes late for the Black Friday sale on flat screen TVs, and finding out you’ll have to pay retail. Be honest: Do you say, “Oh, well, what’s another $500?” Of course not. You wait for another sale, a similar deal from a competitor, or you don’t buy the TV at all.

Since those vaunted money-on-trees types only represent a portion of EV buyers, consider the tens of thousands of normal, middle-class families in that Model 3 queue. For them, even a dead-stripper Model 3 at $35,000—about $1,000 below the transaction price of the average new car—can feel like a lot of money to spend on a car. Because it is. For $27,500, the Model 3 looks like a discount dreamboat, the tax break smoothing the path to a $446 monthly payment (figuring 10 percent down on $27,500, the rest financed over 60 months). Sans that $7,500 tax sweetener, but keeping the same $2,750 down payment, that family is now staring at a $581 monthly payment. Again, think like a real car shopper, not the mythical Midas of EV marketing fluff: If your budget says you can handle roughly $446 a month, many people couldn’t justify a stretch to a more-luxurious car at $581 a month. Now, tell that person that they’re looking at $135 more per month for the exact same car, and they’ll tell you to go plug yourself.

It’s not much different for the higher-end Model 3s, the 310-mile Long Ranger (the only one current being produced) that starts from $36,500—oops, make that $44,000 once the tax party ends, up to a heady $59,950 for a version with enhanced Autopilot and all the tech toys. If your neighbor paid $36,500 for his Tesla, I don’t care if you live in working-class Michigan or movie-star Malibu: You’d sooner chop off your own hand than scribble a $44,000 check for the same car, because Mr. Sweetdeal would rub it in your face over your well-manicured hedge. Even wealthy people know when they’re getting screwed, and there’s something about getting screwed by a car dealer that only amplifies the pain. Especially when it feels like everyone else got, well, a sweet deal.

Certainly, some percentage of card-carrying, climate-loving EV intenders will grit their teeth and cut the fatter check, perhaps by rationalizing that they didn’t lose $7,500, but only $3,750 or $1,875 as the incentives are phased out. State incentives, especially in California, can also soften the blow. Yet arguing that the Model 3 or any other car is still “fairly” priced at the new, higher level—as Tesla’s sideline cheerleaders are already doing—will be like debating angels on the head of a pin.

The pointlessness of valuation arguments unrelated to actual valuation will be driven home at resale time. Whether dealers or private buyers, no one will listen to your pitch about how game-changing the Model 3 is, tied to a sob story about how much you actually paid. Why should they, when that bastard Mr. Sweetdeal, already having beaten you to a discount Model 3, will likely sell them one for thousands of dollars less?

Critically, there’s no obvious bailout in leasing, no time-honored ability for automakers to plump sales numbers with low-monthly-payment lures. First, lease customers were never eligible for the tax break anyway. And when Bolt, Model 3, and other prospects see that the buying math doesn’t add up, automakers will have little or no wiggle room to ease them into an affordable lease via marketing subsidies to create artificially low payments. For one, automakers’ EV profits—meaning “losses” at this point—have been calculated on the basis of people paying full price; letting taxpayers take the hit for a $7,500 discount is a great business model while it lasts. Worse, residual values on most EVs, which automakers calculate to the penny to figure out what to charge you for a lease, have been average-to-awful. The Nissan Leaf suffers some of the worst depreciation of any car, losing at least two-thirds of its original value in three years. In other words, there’s no give in the EV leasing or resale markets, and things can only get worse when prices soar.

Make no mistake: This isn’t about schadenfreude. For the record, I’m all for extending electric-car credits. At some point, EVs will have to stand on their own two feet, but that time isn’t now. From its first days in office, the Trump administration’s whipsawing on the industry and climate change has left automakers playing Washington Whac-a-Mole. They’re trying to pin down any varmint that might help them predict what cars Americans might be buying five years from now, including badly-needed signals on how the government might support or regulate those efforts.

It’s tempting to see all this confusion as a reap-what-you-sow for automakers that have lobbied (successfully so far) to gut or delay President Obama’s historic and overdue increase in fuel economy and emissions standards. Under the umbrella of the Alliance of Automobile Manufacturers, a consensus of foreign and domestic automakers stirringly invoked the free market and their workers’ livelihoods, insisting that only consumers should decide whether they build 16-mpg pickup trucks or 54.5-mpg hatchbacks. Now, when it comes to EVs, they’re suddenly social engineers again, arguing that the battery brigade needs a helping hand, rather than the invisible one they’ve been extolling.

Only in this case, they’re right. Big Oil, between tax breaks, exploration incentives, and cheap leases on federal lands, sucks up what the Obama administration estimated as $4.6 billion a year in direct subsidies—meaning taxpayer dollars that keep pump prices artificially low. That estimate doesn’t include the rising costs of climate change, our dysfunctional relationships in the Middle East, and military protectionism to keep the oil trade pumping and shipping around the globe. A study in World Development estimated a jaw-dropping $5.3 trillion—yes, trillion—in global subsidies for the oil industry in 2015—or 6.5 percent of global GDP, a figure that includes undercharging the oil industry for the costs of climate change. Compared to that, government aid to alternative energy in all its forms is a puny drop in the petroleum barrel.

If the government ever decides that climate change is a thing, or that reducing fossil-fuel consumption and promoting battery-powered competitiveness makes sense, then it can’t expect automakers to do all the heavy lifting. Yet that’s exactly what they face, an untenable tug-of-war between the administration’s coal-fired stance on energy and the clean stuff states and citizens are demanding. The strangling of EV incentives will make it unrealistic, if not impossible, to meet sales quotas for Zero Emissions Vehicles in California and nine other states that hew to West Coast rules.

The Auto Alliance’s own statement says:

“While tax reform is long overdue, it is challenging when we get caught in the middle between contradictory government policies. Automakers are offering more than 30 models of electric vehicles in dealer showrooms but they represented only 1 percent of overall sales last year. The potential elimination of the federal electric vehicle tax credit will impact the choices of prospective buyers and make the electric vehicle mandate in 10 states—about a third of the market—even more difficult to meet.”

And then there’s this, from General Motors; its generically corporate response to the federal government potentially destroying its government-mandated EV business—please, Mr. President, don’t tweet about GM!—is pretty hilarious, but the message isn’t wrong:

“Tax credits are an important customer benefit that can help accelerate the acceptance of electric vehicles. Because General Motors believes in an all-electric future, we will work with Congress to explore ways to maintain this incentive.”

Well, GM, you’d better get exploring. Sure, Congress and the Trump administration, along with the fossil-fuel lackey in charge of the EPA, might support a reprieve and extend EV credits. Americans, awash in cheap gasoline and affordable ICE cars—like the Honda Civic, of which you could have two brilliant Civic Si performance models for the price of a typical Model 3—might decide that today’s already-pricey EV’s are worth $7,500 more than before. Keep dreaming—or start shopping, before the last great EV deal runs dry.