Tesla's electric vehicles may not be eligible for California's new state tax credits if President-elect Donald Trump eliminates the federal tax credit for EV purchases, according to Governor Gavin Newsom's office on Monday.

Tesla shares dropped 4% to $338.59 and further declined by 1.2% in after-hours trading. Trump's transition team is reportedly considering scrapping the $7,500 federal tax credit for EV purchases, as reported by Reuters this month.

Tesla CEO Elon Musk, who advises Trump closely, strongly opposed the idea of excluding Tesla from EV subsidies, stating on X: "Even though Tesla is the only company manufacturing EVs in California! This is insane." Musk has previously expressed support for ending subsidies for EVs, oil, and gas.

Newsom announced that if Trump removes the federal EV tax credit, he will propose a new version of the state's Clean Vehicle Rebate Program, which ended in 2023 and spent $1.49 billion to subsidize over 594,000 vehicles. "The governor’s proposal for ZEV rebates, and any potential market cap, is subject to negotiation with the legislature. Any potential market cap would be intended to foster market competition, innovation, and support new market entrants," his office stated.

California faces financial challenges, including a projected $2 billion budget deficit next year. EVs account for 22% of California sales, totaling 293,000 by September 30. It remains uncertain how much the state program would cost and whether it would include the federal $4,000 tax credit for used EVs and impose similar income and vehicle price limits.

California previously offered up to $7,500 for the purchase or lease of new plug-in hybrids, battery, or fuel cell EVs, potentially funded by the Greenhouse Gas Reduction Fund, financed by polluters under the state's cap-and-trade program.

Musk and Newsom have disagreed on state policies, including the closure of Tesla's Fremont factory during the pandemic and California's approval of a bill on transgender children. In 2021, Tesla relocated its headquarters from California to Texas, with Musk indicating that other companies like SpaceX and social media platform X may follow.

California has surpassed 2 million sales of zero-emission vehicles, doubling sales since 2022. Last month, a California official anticipated the Environmental Protection Agency's approval of the state's plan to stop selling gasoline-only vehicles by 2035, a proposal met with skepticism by major automakers.

California's rules, adopted by a dozen other states, mandate that 80% of new vehicles sold in the state be electric by 2035, with no more than 20% being plug-in hybrid electric.

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