The most popular hybrid models, which also provide the most tax savings, have the shortest credit life.
Kay Bell - Bankrate.com - August 9, 2006
Popular Hybrid Tax savings slowly dwindle.
Toyota hybrid vehicle fans, circle Sept. 30 in red on your calendars.
That's the day you must drive one of these fuel-efficient autos off a Toyota lot or give up half of the new tax break created to reward energy-conscious motorists.
Thanks to the Energy Policy Act of 2005, drivers who trade their gasoline-only autos for cleaner-running hybrid vehicles now get a tax credit instead of a tax deduction. That's a welcome change, since a credit produces dollar-for-dollar tax savings.
But some of the law's other automotive tax components are not quite as appealing.
Tax credit for autos:
- First, there is no set tax credit amount. Precisely how much you can subtract from your final IRS bill depends on which eligible vehicle you buy. So careful car shoppers now must take into account not only miles per gallon and price, but also each auto's varying tax break.
- Secondly, the list of IRS-certified vehicles is not fixed. As automakers produce qualified hybrids, they will be added to the roll, meaning consumers could be comparison shopping without all the possible data.
- Finally, the hybrid credit amount will be incrementally reduced and ultimately eliminated. That's not unusual when it comes to tax laws, but in this case the reduction schedule is particularly vexing because the law didn't set one specific date on which the credit cuts will begin. Instead, the phase-out dates will be determined on a manufacturer-by-manufacturer basis, tied to each automaker's individual hybrid sales.
That forces the car companies and their customers into a bit of a guessing game. They will have to keep their eyes on sales reports and calendars to make sure they get the biggest possible tax break or don't lose the tax savings entirely.
Eligible hybrid vehicles by manufacturer
Toyota/Lexus models and credit amounts- 2007 Toyota Camry Hybrid: $2,600
- 2007 Lexus GS 450h: $1,550
- 2006 Toyota Prius: $3,150
- 2006 Toyota Highlander 4WD Hybrid: $2,600
- 2006 Toyota Highlander 2WD Hybrid: $2,600
- 2006 Lexus RX400h 2WD: $2,200
- 2006 Lexus RX400h 2WD: $2,200
- 2005 Toyota Prius: $3,150
Honda models and credit amounts- 2006 Honda Insight CVT: $1,450
- 2006 Honda Civic Hybrid CVT: $2,100
- 2006 Honda Accord Hybrid AT* with updated calibration: $1,300
- 2006 Honda Navi AT* with updated calibration: $1,300
- 2005 Honda Insight CVT: $1,450
- 2005 Honda Civic Hybrid SULEV MT: $1,700
- 2005 Honda Civic Hybrid SULEV CVT: $1,700
- 2005 Honda Accord Hybrid AT: $650
- 2005 Honda Accord Navi AT: $650
*The 2006 Accord Hybrid AT and Navi AT models without updated calibration qualify for a credit of only $650.
Ford/Mercury models and credit amounts- 2007 Ford Escape Front WD Hybrid: $2,600
- 2007 Ford Escape 4 WD Hybrid: $1,950
- 2007 Mercury Mariner 4 WD Hybrid: $1,950
- 2007 Mercury Mariner 4 WD Hybrid: $1,950
- 2006 Ford Escape Hybrid Front WD: $2,600
- 2006 Ford Escape Hybrid 4 WD: $1,950
- 2006 Mercury Mariner Hybrid 4 WD: $1,950
GM models and credit amounts- 2007 Chevrolet Silverado (2WD) hybrid pickup truck: $250
- 2007 Chevrolet Silverado (4WD) hybrid pickup truck: $650
- 2007 GMC Sierra (2WD) hybrid pickup truck: $250
- 2007 GMC Sierra (4WD) hybrid pickup truck: $650
- 2007 Saturn Vue Green Line: $650
- 2006 Chevrolet Silverado (2WD) hybrid pickup truck: $250
- 2006 Chevrolet Silverado (4WD) hybrid pickup truck: $650
- 2006 Chevrolet Silverado (2WD) hybrid pickup truck: $250
- 2006 GMC Sierra (2WD) hybrid pickup truck: $250
- 2006 GMC Sierra (4WD) hybrid pickup truck: $650
60,000 and counting down
The credit countdown starts when a manufacturer sells 60,000 of the fuel-efficient vehicles. The tax break then is reduced over five subsequent calendar quarters after that 60,001st hybrid hits the road.
So although the credit technically is available through 2010, some automakers will find their vehicles will be of no tax benefit to buyers as early as next year. Others, whose hybrids aren't as hot, could conceivably use the tax credit as a sales promotion all the way up to Jan. 1, 2011.
In essence, the most popular hybrid models, which also provide the most tax savings, have the shortest credit life.
That's exactly the situation in which Toyota and its hybrid's aficionados find themselves.
Paying for popularity
The credit-cut clock started ticking in June for Toyota, the acknowledged leader, primarily due to the popularity of its Prius model.
That month the automaker sold its 60,000th hybrid. That included not only the Prius, coveted by celebrities and not-so-famous drivers alike, but also versions of the automaker's Camry, Highlander and luxury Lexus models. In total, eight Toyota/Lexus hybrids are credit certified.
Under the credit guidelines, the tax break will be phased out over the next five calendar quarters. In the short term, that means if you buy an eligible Toyota hybrid on or after Oct. 1, your tax credit is cut in half. The longer you wait, the more your credit is reduced, until it disappears on alternative fuel Toyotas purchased on or after Oct. 1, 2007.
This table shows what the buyer of a Prius, which at $3,150 offers the largest credit available under the new law, can expect in coming months.
| Tax credit events and deadlines for Toyota Prius buyers | | |
| Date | Event | Available credit |
| Jan. 1, 2006 | Tax credit becomes available for Prius hybrids purchased on and after this date (through Dec. 31, 2010) | $3,150 |
| June 2006 | Toyota sells a total of 60,000 hybrids (all models) | $3,150 |
| July 1, 2006 through Sept. 30, 2006 (first quarter after sales target reached) | Prius purchased during this period still eligible for full credit | $3,150 |
| Oct. 1, 2006 through March 31, 2007 (second and third quarters after sales target reached) | Prius purchased during this period eligible for 50 percent of original credit | $1,575 |
| April 1, 2007 through Sept. 30, 2007 (fourth and fifth quarters after sales target reached) | Prius purchased during this period eligible for 25 percent of original credit | $787.50 |
| Oct. 1, 2007 and beyond | No tax credit allowed for Prius purchases | $0 |
And while the table uses the Prius' dollar amounts, the percentage limits apply to all Toyota or Lexus hybrids bought during the five post-60,000-sales quarters. (In other words, dollar amounts vary with the model.)
Waiting for a break
The biggest problem facing drivers who want a Prius and the full tax credit is the vehicle's availability.
The law requires that the vehicle "be placed in service" by the full credit cut-off date. In some areas, though, buyers are waiting for the Prius they have ordered to come off the assembly line.
"We track our sales very carefully, especially with the hybrid, and we have anticipated that all along," says Cindy Knight, environmental communications administrator for Toyota in Los Angeles county.
"Wait lists for the Prius are down to two-to-four weeks in most areas," says Knight, "and there's good availability still for the two other popular hybrid models: the Camry and Highlander."
Knight says dealers are making sure buyers know of the tax deadline, and there are reports that some buyers are signing up on wait lists at multiple Toyota dealerships to improve their chances of getting a Prius before the tax credit reduction kicks in.
But so far, Knight says her office has not heard of anyone deciding to buy another model or competitor's hybrid out of fear they'll lose a bit of a tax break.
Who's next?
If a tax-anxious Toyota buyer did go looking for another hybrid, it's a good bet he'd end up at a Honda dealership.
Honda has nine models eligible for the tax credit and is running second to Toyota, both in showrooms and by IRS counts.
Through the first half of the year, Honda put around 20,000 fuel-efficient cars on U.S. roads, led by a one-month sales surge in June of the Civic hybrid.
At that pace, industry experts expect Honda to hit the 60,000 sales mark early next year, meaning credits on those vehicles will start dropping by 50 percent and so on next July.
The domestic manufacturers are a lap down in the hybrid race.
The six Ford/Mercury vehicles on the IRS-approved list have accounted for fewer than 12,000 sales. And GM didn't run its nine hybrid vehicles past the IRS until July, so no applicable sales figures are yet available.
Judging from the numbers so far, industry analysts say that it might be 2008 before buyers of the U.S. brands face any tax credit reductions. That's good for Ford and GM, since many of the tax-break amounts for their models are substantially lower than those of their Japanese competitors.
The tax credits are based on a combination of the qualifying vehicle's fuel economy and its total expected lifetime fuel savings, using 2002 fuel efficiency numbers as a base. Since the U.S. automakers got into the hybrid market after Toyota and Honda, they are still playing catch-up and it shows in the credit amounts.
Ford's Escape, with a $2,600 credit, is the only domestic hybrid that matches or exceeds its Japanese counterparts. GM credits are just $250 or $650 on its various alternative-fuel vehicles.
Home highway advantage
Energy conservation advocates generally appreciate the tax effort to encourage drivers to switch to fuel-saving hybrids. Many, however, say that politics trumped a more aggressive, and to their way of thinking, a more sound, approach to reducing U.S. driver dependence on gasoline.
"It's obvious that our government has a problem with creating an energy policy with any kind of vision," says Bradley Berman, editor of HybridCars.com. "The creation of the 60,000 cap was by and large designed to cut some slack to Detroit automakers, who are way behind."
Berman says the credit isn't likely to convert someone who was not even considering a hybrid. At best, it will simply make a potential hybrid buyer look a little more closely at all the alternative fuel makes and models.
Overall automotive costs are a bigger driver when it comes to picking a particular car, says Berman.
"Gas prices have a greater impact than the tax credit. People tend not to think of a large purchase in the big picture over the course of several years," he says.
"There are too many factors - maintenance, resale value, interest rate on your loan - that have a pretty significant impact over the long-term analysis of whether an auto purchase is a sound financial decision."
Knight agrees. She says it's difficult for Toyota to determine whether its hybrid sales have been helped more this year by the new tax credit or high gasoline prices.
"We think that the tax credit is really nice," says Knight. "But we're not sure that it really influences a buyer. There's a combination of factors that makes a hybrid a popular choice right now."
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