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One reason for the rush to reserve Tesla's Model 3? A key tax credit is vanishing.

Go nuts, everyone.
Go nuts, everyone.

On Thursday, Elon Musk unveiled a prototype of Tesla's new Model 3, the much-hyped vehicle that, he hopes, will finally help electric cars go mainstream when it hits the market in December 2017.

The news has induced the sort of feeding frenzy usually associated with shark chum and Apple products. More than 180,000 people have already plunked down a (refundable) $1,000 deposit to reserve their Model 3 a year in advance. In California, Colorado, even Australia, hundreds of fans were lining up to preorder a vehicle they hadn't even laid eyes on yet:

Customers wait in line to put a USD 1,000 deposit on the as yet unseen Tesla Model 3, outside the Tesla store on the Third Street Promenade in Santa Monica, California, on March 31, 2016. / AFP / ROBYN BECK (Photo credit should read ROBYN BECK/AFP/Getty Images)

Tesla fans stand in line inside Park Meadows Mall March 31, 2016 to preorder the new Tesla due to be unveiled Thursday night. (Photo By John Leyba/The Denver Post via Getty Images)

Partly that's because the car seems pretty neat. Musk says the all-electric Model 3 will start at just $35,000, considerably cheaper than Tesla's flashy $75,000+ high-end models. The base version is expected to get a range of 215 miles on a single charge, though the company is hoping to bump up that number eventually. We'll see if Tesla can actually follow through on these grand promises: it's banking on the massive battery-making GigaFactory outside Reno, Nevada, to churn out cheap batteries and keep the car's price down.

But there may be another curious policy reason for this week's Tesla stampede. Right now, the federal government offers a tax credit worth up to $7,500 for anyone who buys an electric car. Except it comes with a catch: The credit starts phasing out for any manufacturer that sells a cumulative total of 200,000 electric vehicles and plug-in hybrids in the US.

Tesla is on track to do just that. It has already sold roughly 65,000 of its high-end Model S vehicles over the past three years and is hoping to sell another 90,000 or so cars this year as its Model X hits the showroom. Some analysts think the company could reach 200,000 cumulative sales sometime in 2017. Once that happens, the federal tax credit for Tesla vehicles would fall by 50 percent for the next two quarters, and then by 75 percent for the two quarters after that1. And then it's gone — unless Congress decided to expand the program.

Note: Separately, California also offers a $4,000 electric vehicle tax credit for anyone whose income is less than 300 percent of the poverty line. It phases out for higher incomes and isn't available for anyone making more than $250,000.

Which means only a fraction of buyers may end up actually qualifying for the tax credit after the Model 3 comes out in Christmas 2017. It's unclear how many of the people standing in line yesterday were aware of this, but they certainly have incentive to try to reserve while it's hot.

Further reading on Tesla's Model 3

  • Our friends at the Verge have a nice rundown of the Model 3's specs. They also took an early prototype for a ride. Key quote: "The Model 3 definitely looks and feels like a Tesla."
  • Note that the 180,000 preorders is awfully impressive. In 2015, total electric vehicles sales in the US were 115,000. (Though, granted, the Tesla deposits are refundable and some people may be slapping them down without intending to buy.)
  • Steve LeVine has a smart piece on how the Model 3 could make or break Tesla as a company. "If motorists buy the Model 3 in the hundreds of thousands, he will have delivered on his vow to make an electric for the general public. ... On the other hand, if the Model 3 achieves only middling sales, expect the bottom to fall out from under Tesla shares."
  • Bryan Lufkin of Gizmodo argues that electric car sharing would be a better option, environmentally, than having a billion Teslas on the road.

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