Tax Credit May Benefit Hybrid Autos
Sales Could Receive a Lift, But Not Everyone Qualifies;
A Limit on Manufacturers
By KELLY K. SPORS
Staff Reporter of THE WALL STREET JOURNAL
December 31, 2005
Starting Sunday, a new tax credit for people who buy hybrid automobiles is expected to boost sales of the more environmentally friendly vehicles.
But there is a hitch: Some consumers, including those subject to the alternative minimum tax, won't qualify for the credit. What's more, each auto maker is permitted a limited number of tax credits, so buyers of some of the most popular hybrids could be out of luck as soon as early 2007.
The tax credit, created in the energy bill signed by President Bush last summer, will replace a $2,000 tax deduction available to hybrid buyers since the autos first went on the market in late 1999. Credits are typically more lucrative than deductions because they lower a tax bill dollar for dollar rather than simply reducing taxable income.
Hybrids typically consume less gasoline than standard automobiles because they use an electric motor to supplement the gas engine. But fuel economy can vary widely: Honda Motor Co.'s Insight with an automatic transmission, for instance, averages 56 miles per gallon, with highway and city driving combined, according to government data. But the Chevrolet Silverado four-wheel-drive hybrid pickup, manufactured by General Motors Corp., gets an average of about 18 mpg.
"Just because it's a hybrid doesn't mean you're going to get 50 miles per gallon," said David Garman, U.S. undersecretary of energy.
Energy-conservation groups and auto makers expect the tax credits for buyers of hybrids will range from $250 to $3,400, depending on the hybrid vehicle's fuel economy compared with that of a conventional vehicle of similar weight. The credit values will typically be higher for hybrids with better gas mileage. The Internal Revenue Service is expected to release official guidance on the new tax-credit values early in the new year.
A Toyota Prius, which gets as many as 60 mpg, according to government data, will likely qualify for a $3,150 credit, while the less-efficient Lexus RX 400h hybrid sport-utility vehicle will likely deliver a $2,200 credit, according to calculations by the American Council for an Energy Efficient Economy.
Most conservation groups say the new tax credit is more generous than the old deduction, but there is one major caveat: Hybrid buyers who pay the alternative minimum tax -- which mostly hits tax filers with higher incomes or many personal exemptions -- can't take the credit because tax credits can only be used against ordinary tax, said Martin Nissenbaum, national director of personal income-tax planning for Ernst & Young. (These taxpayers, on the other hand, were able to benefit from the old tax deduction.) About four million taxpayers are expected to pay the AMT for 2005. This number would jump to more than 20 million for 2006, unless Congress, as expected, extends a patch that prevents millions of middle-income Americans from paying the AMT.
Other roadblocks could prevent hybrid buyers from reaping the savings, too. Congress made the credits available through 2010, but the credits also begin to phase out once an auto maker sells 60,000 qualifying hybrid vehicles. When the manufacturer hits 60,000, the full credit is still available on its hybrids for the remainder of that calendar quarter and the following quarter. Then the credit shrinks to 50% of the original amount for the next two quarters and to 25% for the two quarters after that, until it disappears altogether. Consumers should check with auto dealers to find how much credit is available.
Toyota Motor Corp., which sold more than 130,000 Priuses and other hybrids this year, expects to reach 60,000 in sales by midyear 2006, meaning its credits could be fully exhausted by late 2007. Honda expects to sell about 48,000 hybrids next year, so its credits could start fading by early 2007 and be exhausted completely by mid-2008, says spokesman Chuck Schifsky.
Other auto makers, including Ford Motor Co. and GM, which have few hybrids currently on the market, plan to begin introducing more hybrid models in 2006 and later, and sales of these are expected to benefit from the new credits. GM, for instance, plans to roll out a hybrid version of its Chevrolet Tahoe sport-utility vehicle in 2007, while Ford is planning a hybrid version of its Fusion sedan in 2008.
Hybrids typically cost $2,500 to $5,000 more than comparable standard vehicles, and even the most fuel-efficient models can take more than 10 years to recoup the extra price with fuel savings alone. Plus, hybrid owners worry whether they will eventually need to replace the battery packs hybrids require, which now cost about $3,000.
The new tax credits will accelerate the overall payback, though. The 2006 Honda Civic hybrid, for instance, should recover the price difference over the comparable Honda Civic EX with an automatic transmission in just over two years, assuming the buyer took the $2,100 estimated tax credit, drove 15,000 miles annually and paid on average $2.20 a gallon for gasoline, according to the Alliance to Save Energy, a Washington advocacy group.
Some newer hybrids are more focused on performance than fuel efficiency, meaning there are little fuel savings and typically lower tax credits. And at least one hybrid -- the Honda Insight with a manual transmission -- won't garner any tax credit despite the fact it averages 63 mpg. That is because it doesn't meet another requirement in the tax legislation that restricts the amount of pollutants a credit-qualifying vehicle can emit.
So far, the costs of repairing and maintaining hybrids appear to be in line with conventional vehicles, except that hybrid owners may need to use dealership mechanics because many independent mechanics aren't yet trained in hybrid repair, says Jesse Toprak, a senior analyst for Edmunds.com, an auto-information Web site.
Insurers say it currently costs no more to insure a hybrid than a comparable standard vehicle. |
