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Why Energy Tax Credit Favors Big Vehicles

October 20, 2005

The recently enacted Energy Policy Act of 2005 changes the tax credit for purchasing a hybrid vehicle from a standard deduction to a specific amount per model. The new formula provides greater financial incentives for buying heavy SUVs over more fuel-efficient cars, according to an October 11 report on law, which takes effect in 2006, uses a formula that considers both relative fuel economy and the total amount of fuel saved. This table from the American Council for an Energy Efficient Economy, or ACEEE, estimates the likely tax credits for each vehicle model based on the formulas describe in the legislation. The table shows that on average SUVs receive a higher tax incentive than the most fuel-efficient cars on the market.People who buy the 33-mpg Toyota Highlander Hybrid get a $2,600 write-off--nearly twice the $1,450 tax credit for the 57-mpg Honda Insight. On average, the four most fuel-efficient hybrids, averaging 53.5 mpg, receive a smaller incentive ($2,100) than the five SUVs ($2,310) that get 32.8 mpg.The tax credit is based in part on how fuel efficient the car is compared to the average consumption of vehicles of similar weight, Jim Kliesch, a vehicle analyst with ACEEE, said in the Wired report. For this reason, the Honda Insight receives less credit than the similar performing but heavier Toyota Prius. The fuel savings component is based on the total fuel saved during the expected lifetime of a vehicle, which enables slight improvements to gas-guzzling vehicles to equal that of big improvements in fuel-efficient vehicles. For example, increasing the gas mileage of an SUV from 14 to 16 miles per gallon saves the same amount of gasoline (134 gallons) in a year as boosting the fuel efficiency of a passenger car from 35 to 51 miles per gallon, according to Kliesch.The amount of the tax credit also depends on when you buy. The tax credit is cut in half for each manufacturer three months after the company sells a total of 60,000 hybrids. For example, if Toyota sells 60,000 hybrids by March of 2006, then in July the tax credit is cut in half. It goes down to 25 percent in January of 2007 and ends in June.Therefore Toyota and Honda, which have brought their hybrids to market first, will see the tax credits for their buyers disappear first. A Toyota spokeswoman said she does not believe the tax credit limit is unfair, but said the company may have trouble meeting demand if consumers rush to buy hybrids early in the year to make sure they receive the full credit. She said the company will likely sell 60,000 hybrids within the first six months of 2006, and Toyota has less than one day of supply of Prius vehicles on hand.
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