Capital Commerce: Tangled tax breaks for hybrids
If you want a nice tax break for buying a hybrid vehicle, it might be worth waiting till January. But not much longer than that.
Congress has changed the law to create a new tax credit program for "alternative motor vehicles," potentially broader and more valuable than the old tax-deduction program—but far more complicated. Each car will carry a different tax credit, depending on its fuel economy, weight, and tailpipe pollution.
Another twist: Even though the program purportedly extends to 2010, tax breaks on the most popular vehicles will run out before the end of next year. That's because Congress has limited the number of cars eligible for the tax credit by manufacturer. As soon as an automaker has sold 60,000 hybrids, the tax credit phases out. Since Toyota anticipates selling 100,000 of its Prius hybrids this year alone and customer demand is only rising along with gasoline prices, the tax credit on this top-selling hybrid will be short-lived. American manufacturers, late to the hybrid game, make out better in this deal because they sell fewer gas-electric vehicles. At current sales rates, for instance, the tax credits will last three years for the Ford Escape.
But buyers should expect wide variation in the credits, depending on the car. The government must still write the final rules, but the American Council for an Energy-Efficient Economy has made some projections (available at www.aceee.org). The credit for the current model Toyota Prius would be $3,150, for example, but the Honda Accord hybrid would carry only a $650 credit. Buyers of the Ford Escape could take a $2,600 tax credit, while buyers of the Chevrolet Silverado pick-up truck—considered a "mild" hybrid"—could take only $250.Silverado purchasers, in fact, would be better off buying before December 31, while the simple flat $2,000 deduction that applies to all hybrids remains in effect. That would make its value roughly $300 for those in the 15 percent tax bracket and $660 for those in the 33 percent bracket.
Also, for the first time, tax incentives will extend — in theory — to "clean diesel" cars. But in reality, no diesel now on the market would qualify because none meets the air pollution standards. That may change at the end of 2006, when ultra-low sulfur diesel fuel is expected to hit the market along with new diesel technology. Clean diesel cars could catch on: J.D. Power and Associates estimates that hybrids and clean diesels together will account for 11 percent of the U.S. market by 2012.
Which car on the market will carry the best tax incentive? The Honda Civic GX, which runs on compressed natural gas, will garner a $3,600 tax credit, according to ACEEE, which has long touted the vehicle as the greenest car in America. But annual sales number only in the hundreds, partly because there are few CNG fueling stations. Not to worry: Congress also is providing up to a $1,000 tax break for a home fueling station, which siphons natural gas from the home furnace line straight into the Civic's tank. The typical cost: $3,400, plus $1,000 for installation. Even with tax breaks, alternative fuel is costly.