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Congress Complicates Tax Break for Hybrids

December 28, 2005

WASHINGTON, D.C. – The energy policy bill passed by Congress and signed by President George W. Bush earlier this year complicates limits that federal lawmakers imposed on the new tax credits for hybrids and alternative-fuel vehicles, according to the Newark Star-Ledger. The tax credits, according to a study by the American Council for an Energy-Efficient Economy, could be worth up to $3,600 per vehicle starting next year. And because these are tax credits, which are subtracted directly from a taxpayer's federal income tax bill, they are viewed as more valuable than the $2,000 maximum tax deduction that this year's hybrid buyers are eligible for. Tax deductions reduce taxable income but are not necessarily a one-for-one reduction in the total tax bill the way tax credits are. However, to obtain the maximum estimated tax credit amount of about $3,000 for a Toyota Prius next year, buyers will have to take delivery of their new, fuel-efficient car between Jan. 1 and the end of the quarter that follows the quarter in which Toyota sells and delivers its 60,000th hybrid. In other words, a buyer must buy, take possession, and put into service a Prius during the correct calendar period, timing it to get the top tax credit. Waiting too long or being stuck in a backlog of Toyota hybrid orders with delayed vehicle delivery could mean that a buyer winds up eligible only for 50 percent of the maximum or 25 percent or, ultimately, zero, based on the law's swiftly-timed sliding scale. Company officials worry that IRS officials think they don't need to deal with this implementation immediately, since taxpayers won't be filing with the IRS for their 2006 tax credits until early 2007. But consumers are buying cars and making plans for car purchases now, every day. Lawmakers in Washington put this new energy bill together seeking to limit the number of Americans who would get the hybrid and alternative-fuel vehicle tax relief because of a fear that the federal government couldn't afford to give it to every hybrid buyer. Under the law, each automaker has the same 60,000-sales and calendar-quarter stipulations for the tax credit, though Toyota is expected to hit the limit first and likely sometime in 2006. This is because Toyota is the biggest seller of hybrid vehicles in the United States. For example, sales of the Toyota Prius hybrid mid-size car are expected to top a record 100,000 in 2005. This is about double the number of Priuses sold in 2004, according to the Newark Star-Ledger. The 60,000 figure isn't just for one vehicle, though. It's the total of all tax-credit-eligible hybrids and alternative-fuel vehicles sold by each manufacturer. So, a Prius buyer will want to know Toyota's sales and, importantly, deliveries of all tax-credit-eligible hybrids, such as the Highlander Hybrid, are as 2006 progresses to get in on the tax credit provision. Likewise, a buyer of a Honda Civic Hybrid will want to know about the sales of the Honda Accord Hybrid and the Honda Insight, as well. There's a second reason that hybrid tax credit amounts will vary for buyers. The tax credits are going to be calculated per nameplate, based on a formula that takes into account both fuel savings and reduced emissions. A 2006 Civic Hybrid could carry a maximum tax credit of about $2,000, and the Lexus RX400h hybrid could be eligible for $2,200, according to estimates from the ACEEE. But the 2007 Saturn Vue Hybrid, due out in mid-2006, is estimated to get for no tax credit dollars, according to the ACEEE. An engineering official for General Motors Corp., Saturn's parent company, said final engineering numbers for the upcoming Vue Hybrid have not yet been finalized so he could not comment. While Honda and Ford hybrids sell at a slower pace, they, too, will bump up against the limit at some point in the next few years. Even if tax credits are not all used up, they stop in 2010, according to the new law, reported the Newark Star-Ledger.
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