Why Tesla Wants to Kill the EV Tax Credit

Tesla's support for ending the EV tax credit reveals a strategic move to raise rivals' costs, solidify market dominance, and reshape competition in the electric vehicle industry.

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Photo by Tesla Fans Schweiz on Unsplash

The CEO of the leading electric vehicle (EV) car company in the United States recently announced his support for eliminating the federal EV tax credit—a policy designed to make EVs more affordable and speed up the country’s shift to cleaner energy. The announcement left many puzzled. Tesla’s CEO explained on X (formerly Twitter) that he believed all government subsidies, including those for EVs, should be abolished.

Musk’s position is consistent with his libertarian ideals, but his reasoning goes deeper than philosophy. Far from a surprising twist, Tesla’s support for cutting the tax credit aligns with a well-established tactic in economics. Given Tesla’s dominance in the market, removing the subsidy would only make it harder for competitors to keep up and further entrench its market power.

The EV Tax Credit

The federal EV tax credit offers consumers up to $7,500 on select vehicles and has been an important tool in boosting electric vehicle adoption. By lowering the initial purchase price, the credit has narrowed the cost gap between EVs and traditional gas-powered cars.

Legacy car companies like Ford and General Motors (GM) have relied on the credit to offset the steep costs of producing EVs. Developing new technology, retooling factories, and building supply chains for EV production are expensive endeavors. Without the subsidy, many of these companies lose money on every EV they sell.

Tesla, however, operates from a very different position. They have already scaled up production and optimized their processes, allowing them to benefit from economies of scale that make their EVs more profitable. The company’s head start and dominant market position allow it to absorb the impact of losing the subsidy. Removing the credit would deal a much heavier blow to less profitable competitors who depend on it to stay in the EV game.

Raising Rivals’ Costs

The concept of “raising rivals’ costs” offers a useful lens for understanding Tesla’s support for ending the EV tax credit. Popularized by economists Steven Salop and David Scheffman in the 1980s, the theory explains how dominant firms can strengthen their market position by advocating for policies or practices that increase operating costs for competitors. The strategy doesn’t involve direct attacks on rivals but rather creates an environment where competing becomes prohibitively expensive for others.

Tesla’s scale and profitability give it a cushion against the loss of subsidies while dealing a much heavier blow to legacy automakers. This tactic—using market advantages to put pressure on competitors—is not unique to Tesla. We’ve seen it before in industries ranging from retail to energy.

Consider the case of Amazon and Walmart, two giants in the retail sector. Both companies have been vocal advocates for raising the federal minimum wage to $15 minimum wage. At first glance, their support appears to be a socially responsible stance—an effort to improve conditions for workers. But from an economic perspective, it’s also a strategic initiative to strengthen their competitive position.

Amazon and Walmart have massive scale and can absorb higher labor costs with little disruption. Smaller competitors, on the other hand, often struggle to keep up. For mom-and-pop stores and regional chains, higher wages can strain already tight profit margins. By supporting policies that raise costs for rivals, Amazon and Walmart effectively consolidate their dominance in the retail market, while bragging about their reputations as worker-friendly companies.

Final Thoughts

Raising rivals’ costs might be a clever strategy for businesses, but it often leads to outcomes that hurt consumers. In the case of Tesla and the EV tax credit, this tactic could mean fewer competitors in the EV market. With less competition, consumer choice shrinks and prices might remain higher than they would in a more competitive environment.

The broader implications go beyond Tesla. Smaller automakers play a critical role in the EV market by pushing boundaries, catering to niche segments, and driving technological breakthroughs. Without these competitors, the industry risks having Tesla as the dominant innovator. While its technological leadership significantly benefited the industry so far, relying on a single firm to steer an entire industry into the future could limit the number of options available to consumers.

This development also highlights a recurring tension between free-market ideals and strategic firm behavior. Policymakers must figure out ways to encourage competition in markets dominated by a single firm. The EV tax credit has become weaponized by the very companies it was meant to challenge. Consumers ultimately lose if dominant firms can use their scale and influence to eliminate rivals. The solution may lie in designing policies that account for the outsized influence of industry leaders—before their rivals’ costs are raised too high to overcome.

• In the first quarter of 2024, Tesla produced over 433,000 vehicles and delivered approximately 387,000 vehicles [Tesla Investor Relations]

• Tesla accounted for 49.7% of electric vehicle sales from April through June of 2024 [The New York Times]

• Around 18.7% of all vehicles sold in the United States in the second quarter of 2024 were hybrid vehicles [U.S. Energy Information Agency]

• Ford’s electric vehicle unit reported that losses soared in the first quarter to $1.3 billion, or $132,000 for each of the 10,000 vehicles it sold in the first three months of this year [CNN]