Monday, April 03, 2006

Tax Incentives for Hybrids: Deductions and Credits

We are running out of oil, our main form of energy now. There are promising technologies and alternatives coming tomorrow.

There are numerous tax incentives and rebate programs for using less energy. The most immediate one is for those of us who purchased hybrid vehicles in 2005 (and earlier); depending on the vehicle, you can take a deduction of up to $2,000 off your income, even if you don’t itemize deductions. Depending on your tax bracket, this could reduce your tax bill by about 1/3 of this amount (around $660) this year.

Procrastinators rejoice, in 2006 the energy bill includes a tax credit for hybrids up to $3,600. A credit is subtracted from your total tax, not from your gross income, so it’s an actual dollar savings.

These incentives are interesting in several ways. The obvious is that we consumers have additional motivation to move towards energy efficient vehicles. But this works for the manufacturers too; any additional cost associated with making more efficient engines is offset, making them more attractive to buyers. And this is a pretty significant amount of money, after the credit the total cost will be reduced from $23,000 to around $20,000, or about 13% savings. People have been waiting to take delivery and the long wait for hybrids which has abated recently, is growing again.

Another interesting aspect is that the credit is indexed to the fuel economy of comparable non-hybrid vehicles. So let’s say you own a Toyota or Honda, you do very well this year because your cars are much better than average. But if GM is smart (well, it’s not) it would try and soak up a couple extra MPG out of every car and SUV on the lot by tuning down the existing engines; reduce the “sportiness” but increase the MPG. They can do that and it would hurt their competition by reducing the benefit of the tax break. So in good American competitive spirit, I say go for it. And if they do, there’s a nearly instant reduction in emissions and gasoline usage. This is the kind of incentive I believe in.


Jeff said...

When you say hybrid cars are you talking about alternative fuel cars? I bring this up because you say that consumers purchasing hybrid cars are recieving tax breaks. Are they recieving tax breaks because they are using alternative fuels? And is the tax break being fair to both parties lets say even when the alternative fuel users still use regular gasoline because its cheaper? Just some thoughts.

Larry Eubanks said...

You say it is an incentive you like, but, you make no reference to whether you like it personally or because it is consistent with efficiency. Do you think there are positive externalities involved with this policy that would justify such a subsidy?