Tesla cuts car prices by up to 20%, qualifying some for Biden EV tax credit

The carmaker lowered the cost of the cheapest Model Y by 20% and lopped as much as $21,000 off its most expensive vehicles in its home market. Tesla also made major reductions in countries including Germany, the UK and France a week after its second round of cuts in China since October.

The drastic changes reflect the conundrum Tesla faces after having come up well short of its target for annual vehicle deliveries, despite year-end discounts and incentives that Chief Executive Officer Elon Musk swore off in the past. To continue growing and fully utilize plants that it’s opened or expanded in the last year, Tesla may be forced to compromise the profit margins that Wall Street celebrated when the company was production constrained.

Tesla’s stock fell as much as 5.5% as of 4:30 a.m. New York time Friday, before the start of regular trading. Shares of other automakers including Ford Motor Co. and Rivian Automotive Inc. also slumped.

The changes in the U.S. drop the price of Model 3 sedans and certain Model Y sport utility vehicles below the caps they needed to come under to qualify for as much as $7,500 electric vehicle tax credits.

The Treasury Department and Internal Revenue Service released guidelines late last year that irritated Musk because the Model Y didn’t weigh enough to be deemed an SUV. That’s meant the vehicle is subject to the $55,000 price cap that applies to sedans, rather than the $80,000 limit for SUVs.

Tesla now notes on its website the $7,500 federal tax credit that certain customers are now eligible for will apply to vehicles it delivers through March.

While some parts of the new U.S. law went into effect on Jan. 1, the Treasury Department is still finalizing battery-content sourcing requirements that could cut the tax credit certain EVs are eligible for in half.

Toni Sacconaghi, a Bernstein analyst with the equivalent of a sell rating on Tesla shares, wrote last week that the carmaker was facing “a significant demand problem” and that its challenges would persist in part because its models were too expensive to qualify for tax credits.

“We believe Tesla will need to either reduce its growth targets (and run its factories below capacity) or sustain and potentially increase recent price cuts globally, pressuring margins,” Sacconaghi wrote in a Jan. 2 report. “We see demand problems remaining until Tesla is able to introduce a lower-priced offering in volume, which may only be in 2025.”