Tesla Quietly Reverses its Price Cuts After the IRS Revises EV Tax Credit Rules

Tesla slashed prices for its Model Y by 20 percent last month, then increased it twice in response to a strong demand and the IRS's new EV credit rules that made the cars cheaper for buyers.

Tesla Model Y
Tesla Model Y just got $1,500 more expensive in the past three weeks. Shen Chunchen/VCG via Getty Images

Tesla (TSLA) has been raising the prices of Model Y little by little in a quiet reversal of its dramatic price cuts last month that spurred sales of electric cars.

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The Elon Musk-run company on Feb. 3 bumped up the price of the Model Y Long Range by $1,500 to $54,990 and the higher-end Performance version by $1,000 to $57,990, according to its website. All prices are before order and shipping fees.

The price increases came on the same day the Treasury Department revised its vehicle classification rules to qualify Tesla Model Y for federal tax rebates under the Inflation Reduction Act (IRA) at a higher retail price. The rule change potentially makes the vehicle $7,500 cheaper for buyers who qualify for the credit.

Before Feb. 3, all five-seat versions of the Model Y were classified as small passenger cars by the Internal Revenue Service and subject to the $55,000 retail price cap for vehicles eligible for federal tax rebates. The government allows a higher retail price cap of $80,000 for trucks, vans or sports utility vehicles (SUVs). Only the seven-seat Model Y was classified as an SUV.

However the, Model Y is considered a SUV, regardless of the number of seats, by other federal agencies, including the Environmental Protection Agency and the National Highway Traffic Safety Administration. So the IRS’s unorthodox classification spurred petitions among Tesla fans who urged the agency to revise its rules. Musk also held a meeting with top aides to President Joe Biden last week to discuss the EV industry, the Associated Press reported.

The Treasury Department said Feb. 3 the new vehicle classification is a result of changing its standard to a consumer-facing EPA fuel economy labeling system from a more complicated industry system.

In mid-January, Tesla slashed the prices of various Model Y versions by as much as 20 percent so that they could qualify for the federal tax credit. It also reduced the prices of Model 3 but by a smaller percentage. After the tax credit, an entry-level Model Y was suddenly 30 percent cheaper.

The drastic price cuts sent demand surging, causing Tesla’s U.S. new car inventory to drop more than half in just a few days. Then in late January, Tesla quietly added $500 back to Model Y’s price tag. The price increase was in response to a strong demand, Musk said on Tesla’s earnings call last week. He said the company saw the highest number of orders ever in January following the price cuts.

Tesla Quietly Reverses its Price Cuts After the IRS Revises EV Tax Credit Rules