Tesla Model Y, Model 3 battery pack loophole keeps US prices low by skirting IRA tax incentive rules

News recently broke that the Tesla Model 3 LR AWD had regained the full $7,500 US tax incentive thanks to what appeared to be a battery supply switch, officially bringing it in line with the Model Y. A recent post on X by Sawyer Merritt (via Autoevolution) may explain why the Model 3 suddenly joins the Model Y in compliance with the IRA EV tax incentives.

In basic terms, Tesla is making two versions of each of the Model 3 and Model Y vehicles, and which one buyers get depends on whether they are eligible to claim the EV tax incentive based on their income. To keep the overall Model 3 and Model Y prices down, Tesla has split battery cell manufacturing across two suppliers, LG and Panasonic.

According to Autoevolution, the LG cells are cheaper to manufacture, although they don't qualify for the minimum requirements regarding local materials and assembly specified by the Inflation Reduction Act. Panasonic cells used in the Model Y and Model 3, do, however, meet the minimum manufacturing requirements. As a result, any Tesla Model 3 or Model Y that needs to qualify for the IRA tax incentive will have more expensive Panasonic cells, while EVs that don't will have a battery pack comprised of the LG cells.

Crucially, the Model 3 and Model Y battery performance — in terms of power output, charging, and overall range — are no different. The only difference is that the Panasonic cells will have more raw materials sourced in the US and will undergo more production in the US.

It's worth noting that potential buyers looking at Model 3 and Model Y inventory should be careful that the car they're buying is explicitly labelled as eligible for the IRA tax incentive, otherwise they might be in for a nasty surprise when they try to claim the $7,500 incentive.

Functionally, the tricks Tesla has implemented keep the Model 3 and Model Y prices — and likely company profits — within reason while still accomplishing what the IRA aimed to achieve regarding EV production — at least for the most part. The funds that are directed to the IRA tax incentive program still go towards growing local US EV manufacturing and reducing the country's reliance on imports to achieve electrification.

Tricks like this may soon not be necessary, however, as many EV battery suppliers are seeing the writing on the wall and working on partnerships for US cell manufacturing, LG included.

Currently, the cheapest Tesla Model Y comes in at $44,990 without the tax incentive ($37,490 after the incentive), while the cheapest Model 3 that qualifies for the $7,500 incentive — the Long Range AWD — is $47,490 before incentives (and $39,990 after the full IRA incentive).

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NEWS: Tesla is now manufacturing variants of the Model Y and Model 3 in the U.S. that DO and DON'T qualify for the $7,500 Federal EV credit.Customers who claim eligibility for the credit will be matched to a VIN of a car that qualifies for the EV credit. Those who are not… pic.twitter.com/GnU2gQts1e

— Sawyer Merritt (@SawyerMerritt) June 24, 2024

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