Tesla cuts prices — again — as EV incentive is halved for base Model 3

Tesla Inc. cut prices across its U.S. lineup late Thursday after reporting first-quarter sales that were sharply higher but failed to meet CEO Elon Musk's internal goal of 50 percent per year for the foreseeable future.

Earlier this week, Tesla reported first-quarter deliveries of 422,875 globally for a 36 percent increase over last year. Tesla doesn't break out U.S. sales, but Cox Automotive estimated first-quarter deliveries at 180,993.

Tesla also said Thursday that its most inexpensive vehicle, the base Model 3 sedan, would lose half of the current $7,500 federal tax incentive later this month when new battery-sourcing rules take effect.

"Based on new IRS guidance, the $7,500 credit will be reduced for Model 3 Rear-Wheel Drive on April 18 to $3,750," the automaker said on its online order page.

On Twitter Friday, Musk said cutting prices was the best way to stimulate sales since affordability is holding back buyers and not demand.

Musk pushed back on Twitter commenters who suggested an advertising campaign would drive sales without the need for price cuts.

“So many well off critics don’t understand that demand at scale is limited by affordability,” Musk wrote on the social media site he owns.

“There is plenty of demand for our products, but if the price is more money than people have, that demand is irrelevant.”

Tesla also listed a new version of the Model Y crossover for customer orders with a lower base price and less range than the previous base trim. The new base version is called Model Y whereas the previous entry version was the Model Y Long Range.

After Thursday's price cuts, the automaker listed the base Model 3, with a single motor and rear-wheel drive, at $43,630 with shipping for a $1,000 reduction.

The base Model 3 is the only Tesla in the U.S. that uses a lithium-iron-phosphate battery with cells from China. The new EV credit is based partly on local battery assembly and partly on sourcing of battery materials from the U.S. or a free-trade partner, which does not include China.

Tesla also reduced the price of the Model 3 Performance by $1,000 to $54,630 with shipping. The performance sedan is a dual-motor version with nickel-based batteries from Panasonic. Tesla said on its vehicle ordering page online that the Model 3 Performance will still qualify for the full $7,500 tax incentive after April 18.

The Model Y crossover, Tesla's most popular vehicle, received a price reduction of $2,000 on the Long Range and Performance versions. The Model Y Long Range starts at $54,630 with shipping, according to Tesla's webpage, and the Performance version starts at $58,630.

The company also made a new trim available for custom orders that had previously been limited to inventory models. Tesla opened a second U.S. Model Y plant in Texas last year making the new entry version.

The new base Model Y starts at $51,630 with shipping and is rated for 279 miles of range compared with 330 miles for the Long Range version. According to automotive consultancy Munro & Associates, the base Model Y uses a new cylindrical battery cell from Tesla called 4680 for its dimensions in millimeters.

Tesla said all Model Y versions qualify for the federal tax credit of $7,500 under the new IRS rules.

The new incentive, included in last year's Inflation Reduction Act, is significant for Tesla because the automaker had lost eligibility for the previous $7,500 tax credit in 2020 after reaching its sales quota under the old rules.

Beginning Jan. 1, Tesla regained access to the credit, which does not include quotas but has new rules for North American vehicle assembly, local battery assembly, battery-materials sourcing, price caps and income caps for buyers.

Analysts say Tesla is generally better positioned than competitors since it produces its vehicles and batteries in the U.S., with the exception of battery cells in the base Model 3. In addition, Tesla had previously slashed prices across its lineup in mid-January by up to 20 percent.

Last year's price for the Model Y Long Range was $67,440, with shipping but without the tax incentive. The new base Model Y has a potential cost of $44,130 — including shipping and the EV tax savings.

Other price cuts

Tesla also cut prices Thursday for its two larger vehicles, the Model S sedan and Model X crossover. Neither qualify for the tax incentive due to prices caps of $55,000 for sedans and $80,000 for crossovers and SUVs.

The Model S sedan saw a price reduction of $5,000 and now starts at $86,630, with shipping. The Model X received a $10,000 reduction on its starting trim to $96,630, Tesla said on its webpage.

Last year, the Model S started at $106,440 with shipping, and the Model X started at $122,440. This week's price cuts marked the third round of reductions this year for the two models.

Tesla reported first-quarter production of 19,437 Model S and Model X vehicles combined, and global deliveries of 10,695. In the previous quarter, Tesla reported production of 20,613 vehicles of the Model S and Model X combined and global deliveries of 17,147.

Prior to Thursday's price cuts, some Wall Street analysts had predicted that Tesla would reduce prices to maintain demand in global markets where it's facing increasing competition and economic uncertainty.