Hybrid Vehicle Tax Credits

Skyrocketing gas prices and fears of global warming jump started sales of hybrids and fuel-efficient vehicles last year. In an effort to swell green showroom traffic, the Federal Government offered a tax carrot to seal the deal. Tucked into the Energy Policy Act of 2005 are tax credits for consumers who purchase various advanced technology vehicles, including hybrid-electric and diesel-powered cars and light trucks. The provision, which became effective in January 2006, differs from previous federal incentives for these vehicles by utilizing tax credits rather than deductions. Tax credits typically result in greater savings for consumers. The Feds are offering a tax credit to buyers of hybrid and clean diesel vehicles of $250 to $3,400, depending on the energy efficiency of the model, although none of the current 32 models qualify for the top credit this year.

High Mileage Priorities
Although hybrids are still a very small segment of the vehicles sold in the U.S., they are getting a lot more press and consumer attention. Gas mileage, usually low on the buyers check list, became a buying factor when gas prices soared last year, but as gas prices moderate, hybrids and diesels will need the tax credit to continue their sales climb. States also began to add tax credits and perks for hybrid owners. Some states, like Virginia, offered free access to HOV lanes for hybrid drivers without passengers, in an effort to increase their green profile, but soon found their HOV lanes clogged as more drivers switched to hybrids for the chance at the fast lane during rush hour. Virginia found it had to rethink its hybrid/HOV policy, not allowing new hybrid purchasers to ride solo in high demand HOV lanes. Consumers should check with their state energy offices to find out what extra state tax breaks and perks they can currently get for an energy efficient ride.


The American Council for an Energy-Efficient Economy (ACEEE) posted its estimates of tax credits for 32 hybrid and diesel cars and light trucks that now fulfill or in the near future will fulfill provisions in the bill. Tax credits went into effect on January 1, 2006. ACEEE estimated that the Toyota Prius would get the highest credit, $3,150, which is determined by a vehicle's city fuel economy in relation to the average fuel economy for its weight class. However, the credits are available only for the first 60,000 vehicles the automaker sells and will be phased out over a period of fifteen months for that vehicle. At this time, Toyota is the only automaker, which has sold more than 60,000 qualifying vehicles. Consequently, tax credit amounts for Toyota and Lexus hybrids purchased after September 30, 2006 will be one-half the original tax credit. Tax credit amounts for Toyota and Lexus hybrids purchased after March 31, 2007 will be one-quarter and no credits will be given to Toyota or Lexus hybrids purchased after September 30, 2007. Toyota's Prius now only offers a $1,575 tax credit. Vehicles that save at least 1,200 gallons of fuel over their lifetime versus the average of other vehicles in the same class will get additional credits. The credits are available through 2010.

Emissions Statement
Both diesels and hybrids must meet certain emissions certification levels to qualify: Smaller vehicles must have a Federal emissions rating of Tier 2 bin 5 or better, and larger ones must achieve Tier 2 bin 8, a less stringent requirement. While most hybrid vehicles already meet the emissions requirement, no diesels are currently rated cleaner than bin 9. Diesels will probably reach the magic numbers with the introduction of ultra-low sulfur fuel that hit the pumps in late 2006. ACEEE expects the '08 Mercedes-Benz E320 BlueTec diesel to qualify for a $1,300 tax credit running on low sulfur fuel.


Legislators hope the tax credits will increase the variety and classes of hybrids available to consumers. If gas prices head for the rarified air over $3 a gallon, consumers will be dumping greater shares of their budgets down the tank. That scenario could fuel resurgence in hybrid sales. Toyota's President Katsuaki Watanabe announced plans to sell a million hybrids a year by the end of the next decade, or about 600,000 hybrids in the U.S. To reach that goal, about a quarter of the automaker's vehicles would have to be hybrids. The automaker added a hybrid Camry to its '07 lineup that began sales last year. The Camry sold quickly and the tax credit dropped from $2,600 to $1,300. Both 2wd and 4wd versions of the Highlander Hybrid also sold crisply and their tax credit fell from an initial $2,600 to $1,300. Selling hybrids as a mainstream vehicle still depends upon the price of gas and environmental concerns overcoming the $3,000 to $5,000 premium on these models.