Is Energy Tax Credit Ruining Incentive to Buy Hybrid Vehicles?

As the government reforms its tax deduction program into a broader reaching tax credit I ask myself: Is this program a step in the right direction and who does it benefit? The new system assigns each hybrid model a tax credit based on its fuel saving potential and emissions. The credits are available to the original buyer of a hybrid vehicle purchased after December 31, 2005. Vehicles purchased before that date maybe eligible for other incentives. Also, credits of leased vehicles are at the discretion of the leasing company and are not available to the driver. All used hybrids are exempt.

Some of the benefits of the new tax credits are higher payouts for the most efficient vehicles and more Americans having access to the payout. The previous deduction of $2000 dollars is being replaced with different payouts based on the model car you buy. The Toyota Prius was scheduled to be one of the more lucrative models at $3150. To use the old deduction your total deductions must have exceed the governments generous standard deductions to benefit. Therefore, lower income Americans who don't have a mortgage or make generous donations throughout the year may not have been able to use the previous incentives. A tax credit is beneficial to anyone who has a tax liability at the end of the year. Meaning, the government is entitled to some of the money already paid in or the taxpayer owes more money when they file their return. The new credit can be used to lower your tax liability, but only zeros it out. Meaning you cannot increase your return only avoid paying in more.

The IRS hoped that the new credit would provide manufacturers motivation and means to push their hybrid vehicles. The credit is available on the first 60,000 units a company sells. Toyota, who has been rolling out its Prius sedan in America since 2000, is already on the losing end of the program. The Japanese manufacturer has already sold 60,000 of the most efficient hybrid vehicles in America. Their MPG rates far exceed Honda and domestic manufacturers, and Nissan is only beginning to explore the world of hybrid vehicles in 2007. After 60,000 units are sold a six month grace period begins, then the credit phases out. By the end of 2006 Toyota's credit had already been reduced. To get full credit for your Toyota it must have been purchased before September 30, 2006. Half credits will be issued until March 31, 2007. And, a quarter of the original credit will be issued for vehicles purchased before September 30, 2007. Less than two years after the start date of this incentive a Toyota Prius' credit will have decreased from $3,150 to $787.50. As Toyota rolls out new hybrid Camrys and Highlanders there isn't much incentive to buy these models versus other hybrids on the market or even traditional vehicles.

With the tax credit being phased out many Toyota buyers may choose to buy similarly priced sedans. The standard Camry, which makes its NASCAR debut this year, is priced from $18,470 for the CE trim but only achieves 24/34 MPG versus the Prius' 51/60 MPG. The Yaris subcompact hatchback is $11,150 and reaches 34/40 MPG. With decreasing credits many buyers may opt not to spend the $22,175 on the base trim Prius, and the hybrid Camry costs even more. The incentive hasn't affected Toyota's overall profits by any means. On February 6, 2007Forbes.com reports on Toyota's record sales for the third quarter of their fiscal year. $53 billion dollars, threatening to take over GM's spot as the world's largest manufacturer. But, a month after George W.'s State of the Union speech urging fuel economy reform Prius sales are down 3%. Mere months after the summer gas crisis, SUV and light truck sales are still exceeding car sales. Jeep's new Grand Cherokee SRT8 gets 12/15 MPG, rivaling the finest European sports cars. Ford has decided not to manufacture a subcompact in the United States this year like the Japanese companies and Chevrolet. Seven of Ford's cars are on Forbes Ten Least Green list. Toyota herself is being lead by their truck and SUV sales. Salesmen pushing Tundras with just as much power as their domestic counterparts.

Is the new program a step in the right direction and who does it benefit? The program is already penalizing Toyota for its exceptional sales. The two next best credits belong to the 2007 Honda Civic GX and the 2005-2007 Ford Escape 2WD Hybrid. The Honda Civic is a natural gas alternative that is currently only sold in California as a trial market. It is the most environmentally friendly vehicle available today. With the new credit running through December 31, 2010 there won't be much incentive for Toyota or their buyers unless a new program is rolled out. The other manufacturers will share the same fate, most likely with Honda being the next victim. I can't help but wonder if a lower pay out with no cap on units sold might have affected sales for the better.

Now the benefits will be available to the lower income families who couldn't afford the extra expense before. The wealthiest taxpayers are excluded from the program. The instructions on Form 8910 clearly state not file it if you are subject to the Alternative Minimum Tax (AMT.) With the hybrid price tags averaging $6000 more than the none hybrid counterparts there aren't any incentives available to eat whole difference in cost, but if a buyer keeps the vehicle a few years or more they will probably save the rest of the cost in gas while helping the environment and economy. The program is a step forward in the sense that it's providing aid to a larger group of buyers who probably wouldn't have considered an alternative energy vehicle before. But, with Bush aiming to cut our dependency on foreign oil by 20% it's not nearly enough.

Ultimately our government and the manufacturers can't be held accountable for the condition of our environment. The consumers need to choose alternative energy, low emissions vehicles on their own. With greenhouse gases effecting the global climate and most of the world's oil supply trapped under the Middle East our country needs to decrease its dependency of fossil fuels or we may become fossils! Imagine if America was unable to obtain the fuel supplies we need to function. Not only would we have to shut down our cars which we depend on for transportation, but our power plants, water treatment centers, everything in America requires fuel to run. No matter how it happens we must be inspired to buy more fuel efficient vehicles and find alternative energy sources for everything we use. But, it would be nice if the government was actually at the front of that inspiration.