A Tesla Motors Inc. Model 3 vehicle stands outside the company’s Gigafactory in Sparks, Neveada (Photographer: Troy Harvey/Bloomberg)

Musk's Math on Model 3 Affordability Muddled by GOP Tax Bill

(Bloomberg) -- Tesla Inc.’s bungled launch of its cheapest model yet could prove even more costly now that U.S. Republicans are seeking to cut electric-vehicle tax credits crucial to driving demand for cleaner cars.

The tax bill introduced Thursday by the House Ways and Means Committee would end the credits of as much as $7,500 given to buyers of electric vehicles. The proposed repeal poses risk to the more mainstream consumers Chief Executive Officer Elon Musk’s is pursuing with the Model 3 sedan, which starts at $35,000.

The base version of the car that’s falling behind production schedules costs roughly half as much as Tesla’s cheapest Model S sedan, which along with the Model X crossover can reach price tags of more than $100,000. Even before the repeal attempt, the risk was rising that more Model 3 reservation holders would miss out on the full tax credit because of the manufacturing challenges Musk described Wednesday while reporting a record quarterly loss.

Tesla shares extended declines after details of the tax bill emerged, plunging as much as 8.9 percent. The stock finished down 6.8 percent to $299.26, the lowest close since May 4.

Read more: Businessweek on how EVs may start losing credits

The less-expensive Model 3 -- and the credits that make it even more affordable to more households -- are pivotal to Musk’s mission for electric cars to be accepted by the masses. The U.S. caps the credits for each car manufacturer at 200,000 units, a limit no automaker has reached thus far. Tesla sold about 127,000 Model S sedans and Model X sport utility vehicles through August, according to researcher IHS Markit.

Musk said Wednesday that Tesla wouldn’t reach his target to produce 5,000 units per week of its Model 3 sedan until sometime in March, three months later than planned. He also shied away from reaffirming a forecast made in August that the company would build 10,000 Model 3 cars per week sometime in 2018.

It’ll be “interesting to see churn on the deposit base of Model 3 holders, especially as the timing to receive the car is elongated,” Jeffrey Osborne, a Cowen & Co. analyst, wrote in a note to clients. “What does time and the lack of a tax credit do to demand elasticity?”

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