US electric vehicle sales surged in July, with Tesla (TSLA) fueling the increase with significant price cuts. This surge in EV sales coincided with the upcoming expiration of the federal EV tax credit, and demand for EVs is expected to remain strong in the third quarter.

Kelly Blue Book, a subsidiary of Cox Automotive, estimates strong July sales, initially estimating it to be the second-best month ever, with sales exceeding 130,000 units, a 20% year-over-year increase. Kelly Blue Book's official July statistics will be released next week.

But it wasn't just the expiration of the tax credit that drove consumers to buy electric vehicles; price cuts were also a factor.

Kelly Blue Book reported that the average transaction price (ATP) for new electric vehicles in July was $55,689, down 2.2% from June and 4.2% from the same period last year.

As the top-selling electric vehicle manufacturer in the United States, Tesla was the first to cut prices. Tesla's average transaction price in July was $52,949, down 2.4% from June and 9.1% from the same period last year. Kelley Blue Book said Tesla's incentives increased in July, contributing to a sales increase compared to June but a year-over-year decrease. The agency also said that a higher share of sales of the lower-priced base Model 3 sedan and Model Y SUV contributed to a lower overall average transaction price for Tesla.

Across the industry, the average incentive package for electric vehicles in July accounted for 17.5% of the average transaction price, a record for modern electric vehicle sales and an increase of more than 40% from last year, according to Kelley Blue Book.

"The sense of urgency created by the administration's decision to end IRA-era government-backed EV incentives is expected to fuel significant near-term demand for electric vehicles," said Stephanie Valdez-Strati, senior analyst at Cox Automotive, in a statement. "At this rate, the third quarter will be on track to be our best quarter ever, if not better, as consumers rush in before the major incentives run out."

As for Tesla, its website shows that wait times for the Model Y in the US have lengthened to four to six weeks, up from one to three weeks earlier this summer. Tesla also increased Model Y lease prices by 14%, demonstrating its pricing power as demand for the model rises.

Interior of the new Tesla Model Y Launch Series - Tesla

The next growth driver in Tesla's demand story may come from the launch of its so-called more affordable electric vehicle, which the company says will arrive after the federal tax credit expires. However, Tesla fans may not be happy to hear that CEO Elon Musk confirmed the vehicle will be essentially a stripped-down version of the Model Y, rather than the long-awaited "Model Q" hatchback predicted by Deutsche Bank analysts.

Musk himself warned that the company will face "several tough quarters" after the tax credit ends.