Microscope: hybrid tax credits

Despite the energy bill’s shortcomings, the tax credits for hybrid vehicles are pretty good, with a few important exceptions. They’re performance-based and comprise two parts: a fuel economy credit and a “conservation” (ha!) credit.  We’ve estimated the total credit amounts on current models and posted our results in the incentives section of the consumer center.

So how do these numbers break down? First, the good:

• The fuel economy credit: this gives more credit to vehicles that achieve a bigger percentage increase in fuel economy compared to the average vehicle of the same weight in 2002. The Prius gets the biggest fuel economy credit of any current model - $2,400 for this portion of the credit (plus another $750 for the gas guzzler credit discussed below).
• The regulated emissions backstop: this says that to be eligible for the tax credit, cars and some of the smaller trucks must be at least as clean as the average under EPA’s new Tier II emissions standards.  This is why the dirtier versions of Honda Insight with manual transmission and the Civic Hybrids with lean-burn engines do not get any credit. (sadly there is a loophole larger trucks, see below)

Unfortunately, there are a few bad things in the tax credit too.  There’s been a LOT of confusion over what these things really mean, so let me try and explain it here.

• The “gas guzzler” credit: What this says is that more credit is given to vehicles that have bigger differences in lifetime fuel consumption compared to the average vehicle of the same weight (using 2002 models). What this means is that if the vehicle comes from a class with lousy fuel economy, it can get a bigger credit. It’s called a “conservation” credit but the name could hardly be more misleading. Case in point: the automatic Civic Hybrid achieves the same percent improvement in fuel economy as the Highlander Hybrid 4WD, but the Highlander gets twice the “conservation” credit of the Civic ($1000 vs $500). Why? Because the conventional Highlander consumes 50% more fuel than the conventional Civic, naturally! I see what they were trying to do—push up the worst fuel fconomy offenders.  But at the end of the day you have a perverse “reverse incentive” for people to upsize their vehicle and downsize fuel economy.
• The 60,000 vehicle trigger: This one has the most folks scratching their heads.  This says that once a manufacturer has sold 60,000 eligible vehicles, the credit will begin to be phased out for that manufacturer. That’s not 60,000 per year, it’s a total, and it refers to all models combined. This is going to penalize consumers who want to buy from the leaders in the technology - the manufacturers who have been driving the market for hybrids. While the manufacturers who’ve been sitting on their hands when it comes to hybrids, like GM and DaimlerChrysler, probably won’t be limited by the cap at all, Toyota will probably hit the 60,000 cap in 6 months or less, Honda in a year and a half. Once a manufacturer hits the cap, you’ll have anywhere from 3-5 more months to get the full credit, then the phase-out begins – 6 months at 50% credit and 6 months at 25% credit. So if you’re thinking about taking advantage of this credit with Honda or Toyota, head to that showroom early, and don’t be afraid to ask the dealer to confirm that you will be getting the full tax credit before you buy.
• A loophole in the regulated emissions backstop for large trucks: Vehicles with a gross vehicle weight rating over 6,000 pounds don’t have to meet the Bin 5 standard in order to be eligible for the credit. Instead, they can meet Bin 8, the dirtiest standard once Tier II is fully phased-in, which allows them to emit more than twice as much smog-forming pollution as a Bin 5 vehicle.

I hope this gives folks a better idea of what they might be getting, or not getting, from these incentives in '06.  Next, the sticky world of the Hybrid HOV incentives...

Posted by: Don

Comments

[Eric Glynn]

RE: the so-called gas guzzler differential. Individuals are not being dramatically compensated for "upsizing" as you claim. Relative to what? Consumers are not decomposing the incentive like us policy heads, but looking at the tax credit relative to sticker. The Civic's 2,100 credit is still the greater % discount. From an economist's vantage point, the incentive is appropriately structured. True, it could and should be tilted more favorably toward Civic/Prius, but to the extent purchasing decisions are confined to a size class of vehicle, your criticism loses its force.

[Greg Mebel]

What are the tax incentives available to a county entity when deciding to buy hybrid or regular diesel buses?