Tesla Profit Loss Shows Faults of Government Incentives

Sanders Jett-Folk | @sjettfolk

The electric car giant Tesla had a tough break in the first quarter of 2019. The company announced Wednesday that it had lost a stunning $702 million.

Worse Than Expected Losses

While Tesla had two straight quarters of profit in 2018, Wall Street investors expected losses to occur in this year’s first quarter. However, the profit losses were far worse than they expected.

Financial market data provider Refinitiv had previously surveyed analysts on what they expected Tesla to lose in Q1 of 2019. The average loss estimate was around $301 million. The actual amount lost, $702 million, was more than double that amount.

These same analysts predicted the company would bring in $5.1 billion in sales. This number also fell short, with Tesla bringing in only $4.5 billion in sales.

Federal Tax Credits Partially To Blame

In the past, the tax credit that the government gave to buyers of Tesla vehicles, and other electric cars, was a major selling point of the cars. Any American who purchased a Tesla could receive $7,500 from the federal government. This was enacted to encourage consumers to buy more environmentally-friendly vehicles in an effort to reduce harmful emissions.

However, in August 2018, Tesla announced that the company had hit the 200,000 vehicle delivery threshold the government set. As a result, new Tesla vehicle deliveries are no longer eligible for the tax credit. This has forced Tesla to phase out the tax credit on new vehicle purchases.

Effective January 1st, the federal tax credit was cut in half to $3,750. On July 1st, it will half again, down to only $1,875. Tesla promised that “the tax credit will exist in some form through the end of 2019.”

Without this major purchase incentive, fewer Americans are willing to invest in an expensive electric vehicle. The cheapest Tesla model, Model 3, has a starting price of $35,000. This is an expensive price for many Americans to pay without the tax incentive the federal government formerly provided.

The Tesla Taxpayer Problem

The problem with the federal government offering tax credits on electric vehicles is that the financial burden was on the wrong people: American taxpayers.

By offering $7,500 for buying an environmentally-friendly vehicle, the federal government took on part of the financial burden that should have belonged to Tesla. But the money for these tax credits did not appear out of thin air; it came from American taxpayers.

Now that Americans are no longer getting what is, essentially, a $7,500 cashback for buying an expensive car, fewer Americans are willing to purchase them. The federal tax credit created an artificial value in the minds of consumers, making it seem like a better deal.

Tesla has a problem on their hands. Their expensive car is not worth as much to people when they do not get a cashback for buying it. This is an unsustainable business cycle and just another example of how the government only comes back to hurt both companies and consumers.

What’s The Solution?

Tesla’s solution is easy to identify, but hard to enact. The leader of electric car manufacturing needs to convince American consumers that there is value in buying a Tesla. No cashbacks, no government handouts. They need to merely prove that buying a $35,000+ electric car is a sound investment.

And there are many great things about Teslas. Many Tesla models have 5-star safety ratings. More importantly, climate change is a growing problem, and electric cars can help to significantly reduce oil and carbon emissions.

Tesla needs to rely on the appeal and strengths of their product in order to get more cars into the hands of American consumers. Relying on the government, as in every case, could only work for so long.

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