President-elect Donald Trump made a rather interesting pick in Elaine L. Chao as his choice to be the next secretary of transportation. It’s interesting on a number of levels. But it could also be pretty dire for our favorite electric vehicle producer Tesla Motors Inc (NASDAQ:TSLA) and Tesla stock.
Given Trump’s stance on the environment and Chao’s history as Deputy Secretary of Transportation under President George H.W. Bush and Secretary of Labor under President George W. Bush, TSLA stock could be in for a rocky ride.
The reason comes down to lucrative subsidies and other tax breaks that Tesla and other electric vehicles makers receive. Simply put, the operating environment in which Tesla and others have thrived in over the last eight years could be going away.
With TSLA’s current struggles after eating SolarCity just starting, Chao’s appointment and overall cabinet could be a real kick in the face for Tesla stock.
The Tax Break Problem at TSLA
It’s no secret that Trump and his team don’t believe the science behind climate change. Many of his polices remove various pieces of legislation put in place by Obama to protect the environment and give the Environmental Protection Agency more power to eliminate fossil fuels. Chao could be the piece of the puzzle needed to push many things through Congress. As Mitch McConnell’s wife, Chao already has tremendous influence over much of the political elite.
For TSLA stock, that’s actually a bad thing.
Chao in her other positions within cabinets has been ardent supporter of removing regulations and letting the free market ride. Her eight years as labor secretary were marked by plenty of criticism that her department was lax on enforcement, worker safety and favored businesses over people. Many of the current “right work” laws were based on her ideas.
What’s at stake for TSLA stock and other EV makers such as General Motors Company (NYSE:GM) is a very lucrative system of tax subsides designed to let their cars compete on price with regular gasoline powered cars.
When a consumer decides to buy an EV he or she can get a tax credit of up to $7,500. The idea is to help defray the cost of plunking down $90,000 for a TSLA. That’s a lot of coin going towards spurring electric vehicle adoption. Those lucrative tax breaks could be cut or eliminated to help make good on Trump’s campaign pledge to reduce federal spending.
Already, the main automotive lobbying group — the Alliance of Automobile Manufacturers — has sent letters and associates to Trump’s office in a bid to remove fuel economy standards as well as the Obama administration’s new autonomous vehicle standards on the grounds that it costs them billions of dollars. There’s a real good chance that they will, as the bulk of his team are pro-traditional energy and big on businesses.
And Chao is the missing piece of the puzzle. Fans of electric vehicles will point out that the tax credit is embedded in the larger federal tax code. It’ll take an act of congress to remove it. Given her influence, Chao as transportation secretary is essentially in the driving seat to help make that a reality.
What’s more, Trump’s mega infrastructure plan, of which Chao is a supporter, will need to be paid for. By eliminating these subsidies and using them for bridge and road projects, the Trump Administration would accomplish two major goals. There’s even some chatter about taxing EVs to help pay for roads as the main way the Department of Transportation gets it funding through a gasoline tax.
Bad News For Tesla Stock
For Tesla stock, the loss of the subsidies could be pretty dire. While no one plunking down $90,000+ for one of its top-line models will be influenced by the loss of the subsidy, those looking at its smaller models might be. The Tesla Model 3, which costs $35,000 and is designed to make EVs affordable, would be caught right in the crosshairs of the subsidy fight.
This is the EV for the masses and not necessarily for social or environmentally minded people willing to spend whatever to save the planet. This is about saving on gasoline rather than saving the planet. Without it, some consumers may walk away and buy a comparable gasoline-powered car. Especially if Trump eliminates the taxes associated with traditional cars based on the level of CO2 they emit.
And the latest EV headache comes at a time when Trump and his team are looking to remove various credits for solar energy projects and restore coal power back in the U.S. Heck of a time for TSLA to buy SolarCity, huh?
TSLA Stock Is Still a Sell
As I said before, TSLA is one heck of a technology company. But having great tech or products, doesn’t always translates into profits. Tesla stock is already continuing to struggle. And the current political environment isn’t doing it any favors. While wonder boy Elon Musk has tried to calm investors about the potential of tax credits expiring, the truth is, they’ll hurt EV adoption on a wide scale.
With Chao as transportation secretary, Trump now has the piece of the puzzle needed to fully unravel many of the Obama Administrations polices on green energy and transportation. I’m not sure I would want to be long TSLA stock over the next four years. There’s a very good chance that Trump will be successful in his goals and Tesla stock could see some rough edges down the road.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.