Industry Updates

Tesla Model 3 Tax Incentive Drops to $3,750 in January

Laurance Yap
December 13, 2023
With the demise of the Chevrolet Bolt, the Tesla Model 3 is one of the most affordable ways to get into a new electric car, especially when you apply the $7,500 federal tax incentive. However, starting in January, the Long Range and rear-wheel drive models will only get a $3,750 incentive.
close up of a red Tesla Model 3 driving on the road

Tesla Model 3 Incentive Reduced

The Tesla Model 3, one of the best-selling vehicles in the country – electric or otherwise – has gotten a lot more affordable over the last 12 months as Tesla implemented numerous price cuts as it chased quarterly sales goals. The most recent round of price cuts dropped the starting MSRP of the electric sedan to just $36,260 – meaning an effective cost of under $30,000 after the federal tax incentive of $7,500 was applied. With the Chevrolet Bolt winding up production until its replacement arrives in 2025, the Model 3 became one of the country’s most affordable EVs.

Now, however, the federal tax incentive on the base rear-wheel drive Model 3 and the all-wheel drive Model 3 Long Range is set to drop to $3,750 starting January 1. The home page of the company’s website says that while all models are currently eligible for the $7,500 credit, reductions are “likely” after December 31. The order page for the Model 3 now shows that the federal incentive will drop by 50 percent, and encourages buyers to purchase the vehicle and take delivery before the end of the year to receive the full credit.

Tesla Model 3 close up

Why Is the Incentive Changing?

As the federal government clarifies its rules around the sourcing of battery components and critical minerals, which stipulate minimum requirements for North American content, it has also introduced restrictions around “foreign entities of concern” (FEOC). If a battery company’s ownership includes a 25 percent or higher share from China, Russia, North Korea and Iran, its batteries are ineligible for the incentive. The batteries in the Model 3 Long Range and Model 3 rear-wheel drive contain Chinese-made components. The batteries in the Model 3 Performance don’t have the same issue, as they source components from North American suppliers.

The federal government’s incentive structures are tied to the Inflation Reduction Act, which requires that any electric vehicle subsidy is connected to the North American free trade zone. Over time, the requirement for North American components ramps up progressively, rising to 80 percent by 2027 from the current levels. The aim is to incentivize the industry to build a battery supply chain in North America, and reduce U.S. reliance on components from China. Many manufacturers, such as Ford, Stellantis, BMW, Volkswagen, and Toyota, have already made significant investments in local battery production, although many of them still source some components from Chinese-owned entities.

Tesla Model 3

New Tesla Model 3 on the Way

Meanwhile, even as Tesla tries to sell down stock of its existing Model 3 by the end of the year by encouraging buyers to take advantage of the full tax credit, a significantly revised Model 3 is around the corner – with updated styling, improved performance and range, and more tech features. It’s unclear at the moment where the components for the new Model 3’s battery are sourced, or what its starting MSRP will be when it goes on sale next year.

Front view of a Tesla Model 3 driving through canyon roads

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