Tesla will lose federal subsidies; so something big needs to be done.

The California state Assembly passed a $3-billion subsidy program for electric vehicles, dwarfing the existing program. The bill is now in the state Senate. If passed, it will head to Governor Jerry Brown, who has not yet indicated if he’d sign what is ostensibly an effort to put EV sales into high gear, but below the surface appears to be a Tesla bailout.

Tesla will soon hit the limit of the federal tax rebates, which are good for the first 200,000 EVs sold in the US per manufacturer beginning in December 2009 (IRS explanation). In the second quarter after the manufacturer hits the limit, the subsidy gets cut in half, from $7,500 to $3,750; two quarters later, it gets cut to $1,875. Two quarters later, it goes to zero.

Given Tesla’s ambitious US sales forecast for its Model 3, it will hit the 200,000 vehicle limit in 2018, after which the phase-out begins. A year later, the subsidies are gone. Losing a $7,500 subsidy on a $35,000 car is a huge deal. No other EV manufacturer is anywhere near their 200,000 limit. Their customers are going to benefit from the subsidy; Tesla buyers won’t.

This could crush Tesla sales. Many car buyers are sensitive to these subsidies. For example, after Hong Kong rescinded a tax break for EVs effective in April, Tesla sales in April dropped to zero. The good people of Hong Kong will likely start buying Teslas again, but it shows that subsidies have a devastating impact when they’re pulled.

That’s what Tesla is facing next year in the US.

In California, the largest EV market in the US, 2.7% of new vehicles sold in the first quarter were EVs, up from 0.4% in 2012, according to the California New Dealers Association. California is Tesla’s largest market. Something big needs to be done to help the Bay Area company, which has lost money every single year of its ten years of existence. And taxpayers are going to be shanghaied into doing it.

To make this more palatable, you have to dress this up as something where others benefit too, though the biggest beneficiary would be Tesla because these California subsidies would replace the federal subsidies when they’re phased out.




It would be a rebate handled at the dealer, not a tax credit on the tax return. And it could reach “up to $30,000 to $40,000” per EV, state Senator Andy Vidak, a Republican from Hanford, explained in an emailed statement.

This is how the taxpayer-funded rebates in the “California Electric Vehicle Initiative” (AB1184) would work, according to the Mercury News:

The [California Air Resources Board] would determine the size of a rebate based on equalizing the cost of an EV and a comparable gas-powered car. For example, a new, $40,000 electric vehicle might have the same features as a $25,000 gas-powered car. The EV buyer would receive a $7,500 federal rebate, and the state would kick in an additional $7,500 to even out the bottom line.

And for instance, a $100,000 Tesla might be deemed to have the same features as a $65,000 gas-powered car. The rebate would cover the difference, minus the federal rebate (so $27,500). Because rebates for Teslas will soon be gone, the program would cover the entire difference – $35,000. This is where Senator Vidak got his “$30,000 to $40,000.”

The Tesla Model 3 would be tough to sell without the federal $7,500. But this new bill would push Californian taxpayers into filling the void. It would be a godsend for Tesla.

AB1184 would be a huge expansion of the current Clean Vehicle Rebate Project which has doled out 115,000 rebates for $295 million to buyers of EVs and hybrids since 2010, averaging about $2,550 per rebate.

Under AB1184, hybrids and hydrogen powered cars are not included, and rebates for plug-in hybrids are slashed – perhaps to keep Toyota’s technologies at bay.

Even the current, relatively small Clean Vehicle Rebate Project has been lambasted as a subsidy for the wealthy who can afford to spend $100,000 on a set of wheels. A study, cited by the Mercury News, showed that of nearly 100,000 rebates, over 80% went to Californians with incomes over $100,000. This notion of a subsidy for the wealthy also applies to the federal rebate.

So California’s program was adjusted last year to cut rebates for wealthy buyers and increase rebates for low and moderate income buyers. That hurt Tesla. Another reason for a new program to make Tesla whole.

I admit, I’m not totally impartial. Our next car will be an EV. Something with the performance of a Chevy Bolt would be able to handle 99% to 100% of our driving needs – commuting in the Bay Area and driving to surrounding recreational spots, and very rarely a little further. We don’t haul horse trailers across the Rockies.

By the time we’re ready to get rid of our internal-combustion-engine car, battery technology will have improved further. We’d even pay a little more, just to get the benefits of an EV. My wife drives 45 miles a day; she’d no longer have to go to the gas station. The EV would be charged at night in our garage. Fuel savings would be substantial. Maintenance hassles and costs would be slashed – a benefit for me. And EVs are great to drive.

We’ll buy that EV even without incentives if they go away by then, though we’ll try to maximize any incentives with a grateful nod to our beaten-up fellow taxpayers. But piling on incentives is no longer the way to go. Piling on incentives that might be $10,000 or $20,000 or more per vehicle is insane. Piling on incentives to support a money-losing company that will soon lose the benefit of the federal subsidy is going way too far.

Who will the funds be extracted from taxpayers? California’s Cap and Trade has already been short-listed. Senator Vidak, whose district is beautifully gerrymandered from Fresno to around but not including Bakersfield, put it this way:

“Now the state appears to be in the business of subsidizing a billionaire’s company (Tesla) and millionaires who want to buy these boutique electric cars. In my backyard, where I live, people are very, very poor, and they are already paying into Cap and Trade. If Cap and Trade continues to go forward, that could add another 40 cents, 45 cents, maybe more to the cost of a gallon of gasoline, for those folks… [who] are still not going to be able to afford these $70,000+ cars.”

“Electric car companies are having trouble making it in the market-place without heavy government subsidies. So they propose this law to not only boost their sales but also to ace-out their competition. The Legislature is once again picking winners and losers in what is supposed to be a free-market.”

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