Why Are Tesla Cars So Expensive?

Tesla Inc. (TSLA) owners can save substantial money on fuel, but the electric vehicle comes with other costs to consider, including a higher-than-average price tag.

The earliest Tesla cars rolled out at very high price points, and Tesla’s cars are still expensive compared to the industry average. Tesla’s Model X started at about $120,000 as of August 2022, Model S sedan started at a base price of about $105,000, Model 7 started at about $67,000, and Model 3 started at about $47,000.

If you’re considering buying a Tesla, you’ll want to factor in tax credits for electric vehicles. The Inflation Reduction Act of 2022, which was signed into law on Aug. 16, 2022, brings some changes to the existing $7,500 tax credit. The tax credit, with some adjustments, is now extended through 2032.

Learn more about the limits for the tax credit for electric vehicles like Tesla, and how they impact the total cost.

Key Takeaways

• Tesla’s electric vehicles (EVs) are generally more expensive than many other traditional or hybrid vehicles.
• Tesla’s cars range in price from around $120,000 for a Model X to about $47,000 for a Model 3.
• A tax credit of up to $7,500 for new electric vehicles is now available through 2032 under the Inflation Reduction Act of 2022.
• More expensive EVs, such as Tesla’s Model S and Model X, do not qualify for the tax credit.
• High demand for Teslas has led to a problem keeping up with production, leading to a waiting list for vehicles.

Supply and Demand

The electric vehicle market is changing fast, and Tesla is among those leading the way. In July 2022, the average price of an electric vehicle was $66,645, compared to the industry average of $48,182, according to Kelley Blue Book data.

Tesla has been focused on expanding its luxury offerings to include more affordable options, like the Model 3. Demand for Tesla cars has resulted in a waiting list for back-ordered vehicles as the company regularly sets new sales records.

Traditional car companies, which are Tesla’s main competitors, have been hesitant to undertake electric vehicle (EV) production because of the high production costs. But some of these companies, including Toyota (TM), Ford (F), and General Motors (GM), launched or have plans to launch all-electric cars to compete with Tesla’s models.

Unlike established car companies, Tesla does not have the manufacturing capacity to meet the current demand. Basic economics dictates that when demand for a product is high, the price rises.

The high demand for Teslas is fueled in part by the green energy movement. Tesla cars are all-electric, so they do not consume greenhouse gas-emitting gasoline and do not directly create carbon dioxide. Still, carbon dioxide is a by-product of the electrical generation needed to charge the car’s batteries. Demand is also driven by consumer preference for Tesla’s sleek, modern design and its high-tech driver interface and dashboard of all-digital, touch-sensitive display.

Tesla Model X dashboard.

Many drivers also value the fact that electric cars are virtually silent when they drive. But Tesla cars are also high-performance vehicles. The Model S can cruise for nearly 400 miles on a full charge and can accelerate from 0 to 60 miles per hour in less than two seconds. The Tesla Model X is a more family-friendly SUV that can comfortably fit seven passengers. 

Tesla is constructing an enormous Gigafactory in the Nevada desert. The facility allows the company to scale up production of both its cars and the battery packs required to power them. Its goal is to produce 500,000 cars per year.

Battery Technology

Batteries to store and use electrical power are the most expensive component of Tesla cars. One of management’s main goals has been to reduce the battery costs per kilowatt-hour for its cars, and the company has made some significant headway toward that goal. Estimates show that Tesla’s battery costs declined from roughly $230 per kilowatt-hour in 2016 to $127 in 2019. Because of the company’s higher volumes, Tesla’s battery costs are about 20% lower than the industry average.

A lot of research and development (R&D) is going into battery technology, and the hope is that in a short time, the cost of battery power storage will be able to compete with the cost of gasoline or other fossil fuels.

Tax Credit for Teslas

For Tesla cars to qualify for the full $7,500 tax credit under the Inflation Reduction Act, the company must eventually abide by sourcing requirements for batteries. Minerals and other components used to make EV batteries must primarily come from North America.

The federal tax credit of up to $7,500 for electric and hybrid vehicles was phased for some models that reached certain sales thresholds. Under the Inflation Reduction Act, those models now qualify, but more expensive models now do not. Buyers must meet certain income limits as well.

The $7,500 tax credit applies to new vehicles. Used vehicles may receive a tax credit of up to $4,000 or 30% of the sales price, whichever is less. More expensive electric vehicles, such as the Model X and Model S, do not qualify for a tax credit. To qualify, sedans may cost no more than $55,000 and trucks and SUVs may cost no more than $80,000.

Finally, you must meet income requirements to receive the tax credit. You can’t earn a modified adjusted gross income (MAGI) above $150,000 as a single filer, $225,000 if you’re filing as head of household, or $300,000 for those filing jointly.

The Bottom Line

Tesla cars are expensive, even with tax credits factored in. But they remain in high demand. One reason why the price is so high is that demand has been outpacing supply. Expanding production capacity and building new factories may help moderate prices.

The other main reason why Tesla’s prices are high is the high cost of the electric battery packs that power these vehicles. While the cost of battery technology and its energy efficiency have improved over the past few years, electric cars are still significantly more expensive than the industry average.