Tesla Model 3 & Model Y Now Cost Less Than Gasoline-Powered Equivalents
For years, we have been hearing the same old refrain about how electric cars like Tesla cost so much more than cars powered by gasoline engines that only the wealthy can afford them. For many, their attitude was, “Call me when EVs are affordable.” Well, now the call has arrived. Our own Paul Fosse recently wrote about how you can get a Tesla at the cost of a Toyota or Honda, and how to upgrade from a Honda Accord or Nissan Altima to a Tesla “for free” — and that was before some recent Tesla price cuts! Now, Canary Media says the tipping point on price parity has been reached, so people who have claimed Teslas aren’t affordable will now have to find another excuse to stick with cars that feature an infernal combustion engine.
A series of price cuts this year have brought the cost of a basic Tesla Model Y down to $43,990 before federal and state rebates, taxes and fees. The Model 3 is $38,990 before rebates and charges, according to Tesla’s website. Both models qualify for the full federal EV tax rebate, which makes the effective price of those cars $36,490 for the Model Y and $31,490 for the Model 3.
Andrew Krulewitz, founder of EV financing startup Zevvy, told Canary Media those prices are “silly cheap.” He said that the average price of a new car in the United States today is about $45,000 and the price of an average used car is nearly $30,000. “That places the Model Y between the new and used [internal-combustion-engine] average,” even before rebates, Krulewitz said. And there are state and local incentives available in some parts of the country that can lower the cost of a new Tesla even more.
Tesla & The EV Tax Rebate
Until now, the federal EV tax credit has been confusing, but basically it said if the price of the car was below a certain limit — $55,000 for sedans and wagons, $80,000 for SUVs and light duty trucks — and if the purchaser met certain income guidelines, and if both the battery materials and battery components were produced in North America or a number of other counties (essentially any country but China), and if the vehicle had its place of final assembly in North America, there was a federal tax credit available of $7,500.
But tax credits can be tricky things. First, you don’t get to take advantage of a tax credit until you file your federal tax return in the following year. Second, if you have a federal tax liability of less than $7,500, you get less money — potentially nothing in some cases. But on January 1, 2024, all of that changes.
Everything Changes January 1, 2024
As of that date, the tax credit goes away and becomes a point of sale rebate, one the buyer can use immediately. The dealer simply deducts the rebate from the sale price and gets reimbursed by the IRS, supposedly within 72 hours. This opens up the market to low- and moderate-income car buyers and helps advance the Biden administration’s goal of EVs making up half of new car sales by 2030.
According to new IRS regulations published last week, “Under the Inflation Reduction Act, consumers can choose to transfer their new clean vehicle credit of up to $7,500 and their previously owned clean vehicle credit of up to $4,000, to a car dealer starting January 1, 2024. This will effectively lower the vehicle’s purchase price by providing consumers with an upfront down payment on their clean vehicle at the point of sale without having to wait to claim their credit on their tax return the next year. Only vehicles purchased under the consumer clean vehicle credits are eligible for this benefit.”
Canary Media says Tesla offers some of the most affordable and popular EVs on the market, but it’s not the only automaker whose electric car offerings cost less than the average price of a new car. However, availability can be an issue, as several manufacturers only sell their EVs in states that follow the zero emissions rules set forth by the California Air Resources Board.
Electric vehicles accounted for more than 7 percent of new cars sold in the U.S. in the first half of 2023. That’s an important milestone. “Once 5 percent of new car sales go fully electric, everything changes,” according to an analysis by Bloomberg Green. It calls the 5 percent point a key tipping point that marks the shift to mass adoption. After that threshold is crossed, Bloomberg contends, “technological preferences rapidly flip.”
Just The Beginning
This is just the beginning of a seismic shift in the multibillion-dollar automotive market, Canary Media says. “The transition to EVs is unsurprisingly proving to be a messy affair that is both constructive for the goal of cutting emissions but destructive for the auto industry status quo. We’re now in the high velocity portion of the growth curve, and it’s not wholly unexpected that traditional market structures and supply chains will experience some growing pains.”
Despite repeated reports of its inevitable decline, Tesla is maintaining its EV lead over incumbent automakers like General Motors, Ford, and Volkswagen. Even after recent price cuts, Tesla is still posting better overall profit numbers than most traditional automakers. (We will find out more about that next week during the Tesla Q3 earnings call.) Only China’s BYD is keeping up with Tesla’s scale and growth in EVs.
The battle for the electric truck market is also about to begin. Rivian’s R1T electric truck continues to outsell Ford’s F-150 Lightning. Meanwhile, after years of delay, Tesla’s Cybertruck will finally launch soon — two years behind schedule. Pickup trucks in particular are a high-profit-margin product line, which is why the UAW last week scored important concessions from GM within hours after it threatened to expand its strike to the Arlington, Texas factory where the company’s most profitable vehicles are made.
The electric car era is transforming manufacturing and vertical-integration strategies, too. Tesla has shown that the manufacturing methods and corporate structures of the conventional car business are not always well suited to EV manufacturing. Legacy automakers will learn this lesson, one way or another.
“Like every rapid technological shift, from home telephones to smartphones, to the rapid deployment of solar, the EV transition seems inevitable now that we’re in it. We’re living through the breakneck ride to electric transportation and the starting gun has just gone off,” Canary Media says.
The Takeaway
The question now is whether the allure of that point of sale rebate in less than three months time will convince some EV customers to keep their hands in their pockets instead of signing on the dotted line until after the new year, lowering sales in the 4th quarter and giving EV detractors more fodder to say the EV revolution is fizzling out. That certainly is a distinct possibility, especially for those who might not have gotten the full tax credit in the first place.
But not to worry. If EV sales in the US are at 7% now, we can expect 2024 to be the year the dam breaks and EV sales begin to surge, especially when word gets out that electric cars are now less expensive than their gasoline-powered cousins and cost far less to own and operate as well.
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