Tesla's potential hardship: Elon Musk predicts turbulence following phase-out of electric vehicle subsidies
Tesla Faces Challenges as Federal EV Tax Credit Ends and Production Plans Delayed
In a significant blow to the electric vehicle (EV) industry, the One Big Beautiful Bill Act, signed into law on July 4, 2025, has ended the federal EV tax credit effective September 30, 2025. This move removes a major financial incentive for consumers buying EVs, including Tesla vehicles.
The elimination of the federal EV tax credit could increase the effective purchase price of Tesla vehicles, potentially reducing consumer demand or slowing sales growth, especially for price-sensitive buyers who factored in the tax credit. Tesla's share price fell more than 4% in after-hours trading on July 23 and slumped more than 7% the next morning, reaching around $308.
Tesla delivered about 384,000 cars in Q2, a drop of 13% from the prior-year quarter. This decline is partially attributed to the loss of EV credits, which has delayed the ramp-up of production for the lower-cost model. The increased production of the more affordable car is now scheduled for the fourth quarter.
The end of the federal tax credit is also expected to cost Tesla about $300 million this year. The company's executives declined to provide guidance for the rest of 2025, citing global trade and fiscal policies, cost structure, and demand for durable goods as factors affecting their results for the rest of the year.
Despite these challenges, Tesla's ambitions lie in robotics, with a focus on artificial intelligence for their Optimus robots. Musk expects Tesla to produce prototypes of the third version of Optimus by the end of this year, and production at scale for Optimus robots is expected to start in 2026. Tesla leaders cited global trade and fiscal policies, cost structure, and demand for durable goods as factors affecting their results for the rest of 2025.
In the medium to long term, Tesla might face a more challenging policy environment in the U.S. given the bill's rollback of clean energy tax incentives, but their global sales exposure and product pipeline might offset domestic headwinds. Tesla's strong brand, expanding model lineup, and market leadership may mitigate some negative impacts, as not all buyers rely solely on tax credits.
However, Tesla's car business could experience rough quarters due to the elimination of federal tax credits for electric vehicles on Sept. 30. The company has a limited supply of vehicles to sell ahead by Sept. 30 and may not be able to guarantee delivery orders placed in the later part of August and beyond.
In Q2, Tesla produced a net profit of nearly $1.2 billion on total revenues of $22.5 billion. Changes in mix lowered Tesla's average selling price for Q2, contributing to free cash flow being $146 million last quarter.
References: [1] One Big Beautiful Bill Act [2] Inflation Reduction Act of 2022 [3] Section 45Y and 48E [4] OBBAA and Clean Energy Tax Credits
- The ending of the federal EV tax credit may lead to an increase in the effective purchase price of Tesla vehicles, potentially affecting both consumer demand and sales growth.
- The loss of the EV credits has delayed the ramp-up of production for Tesla's lower-cost model, with the increased production now scheduled for the fourth quarter of the year.
- The elimination of the federal tax credit is expected to cost Tesla approximately $300 million in 2025, and the company's executives have noted global trade and fiscal policies, cost structure, and demand for durable goods as factors affecting their results for the rest of the year.
- Despite these challenges, Tesla is focusing on the development of artificial intelligence for their Optimus robots, with plans to produce prototypes of the third version by the end of the year and production at scale for Optimus robots starting in 2026.
