Hybrid Watchdog: SUV Tax Loophole vs. Hybrid Tax Credits
"A Hummer of a Loophole"
Origin of the SUV Tax Deduction: "A Hummer of a Loophole"
A 1997 provision in the U.S. tax code (Section 179) provided small businesses with a tax write-off of up to $25,000 for a vehicle weighing more than 6,000 pounds- used 50% of the time for work purposes. The original intent behind this provision was to encourage investments in pickup trucks, minivans, and other needed service vehicles. A far smaller incentive was provided for cars--less than $7,000 over two years.
Today’s average vehicle fuel economy is at a 20 year low (24 mpg on government tests).
The explosion of SUV, pickup, and minivan sales in America's passenger vehicle fleet has turned this small business benefit into a massive loophole in the tax law. Currently, 38 different passenger SUVs including the Lincoln Navigator, which nets a combined 15 miles per gallon according to the Environmental Protection Agency (EPA), the Cadillac Escalade (16 mpg), the BMW X5 (18 mpg), the Mercedes-Benz ML55 (16 mpg), and the notorious Hummer H2 (estimated 11 mpg) all weigh more than 6,000 pounds. This loophole allows some of the most fuel-inefficient passenger vehicles on the road today to qualify for a significant tax break.
In 2003, the Bush administration proposed increasing the tax deduction to $75,000. Lawmakers responded by expanding it to a whopping $100,000 as part of the $350 million tax cut package. Yet Congress did not change the weight-based classification of the vehicles, creating a huge benefit for the largest, least efficient vehicles.
Accountants, SUV dealers rush to capitalize
Around the country, auto dealers such as "the Car Guy" Jerry Reynolds in Texas and hundreds of accountants and online tax management sites have been encouraging small business owners such as doctors, lawyers, and realtors to rush out and take advantage of this tax windfall. One advertisement from Dugan & Lopatka, an accounting firm in Wheaton, IL, reads, "Write-Off 100% of Your New SUV? Yes, If It's Under 100,000!"
According to a November 7, 2003, article in the Washington Post, Dugan & Lopatka were so inundated with phone calls regarding their advertisement they nearly had to shut down their switchboard. Industry analysts predicted a spike in purchases last November and December due to the typical year-end rush to claim the deduction for tax returns.
Senators push for closure of loophole
Several proposals have been offered to fix the loophole. At one point, the Senate Finance Committee staff actually proposed raising the weight limit to 14,000 pounds, enough to disqualify even the Hummer. Bills introduced by Senator Barbara Boxer (D-CA) and Representative Anna Eshoo (D-CA) would take a different approach to closing the SUV tax loophole. In The SUV Business Tax Loophole Closure Act, they propose that SUVs weighing 6,000 pounds or more simply be reclassified as cars under the tax code.
100 years ago Ford’s Model-T got better fuel economy than today’s average SUV.
In October, after the House Ways and Means Committee approved a 3-year extension of the $100,000 loophole, a House-Senate conference committee negotiated a roll back in the deduction to its original amount of $25,000 as part of the larger Corporate Tax Bill. While tightening this loophole is certainly noteworthy, it is by no means the end of significant tax breaks for gas-guzzling SUVs. According to an analysis in the Detroit News, besides the $25,000 basic equipment deduction, SUVs will still qualify for "bonus depreciation," an added write off of 30 percent of the purchase price above $25,000. Beyond that, additional costs can be deducted according to regular depreciation rules, or 20 percent in the first year. For example, a business owner purchasing a Hummer H1, with a sticker price of $106,185, would be able to deduct $60,722 in the first year under the revised rules: a $25,000 equipment deduction, $24,356 in bonus depreciation, and $11,366 in regular depreciation.
Hybrid vehicle credits & The CLEAR Act
In May 2002, the IRS declared gasoline/electric hybrids eligible for tax deductions as "clean fuel" vehicles under the Energy Policy Act of 1992 (PL 103-486). The deduction ceiling began at $2,000, with the tax deduction set to end in 2006, with $500 less available each year as the deduction is phased out.
UCS has been working with a bipartisan group of senators and representatives to develop a comprehensive package of tax credits for the purchase of a full range of alternative-fuel and advanced-technology vehicles. This package was introduced by Senators Orrin Hatch (R-UT) and Jay Rockefeller (D-WV) and Congressman Dave Camp (R-MI) as the CLEAR Act in March 2003. Improving on current tax law, these incentives are designed to be performance-based, ensuring that credits go to vehicles that get significant fuel economy and low tailpipe emissions.
Hybrids are more expensive than their conventional brethren, but don't just look at the sticker price. Take into account the $2000 federal tax deduction, the money savings on gasoline, and any state or local incentives into account before you buy.
The CLEAR Act passed the Senate Finance Committee with strong environmental provisions intact, but unfortunately, the House dramatically weakened the bill by removing the hybrid tax credit and replacing it with a credit for diesel vehicles. If and when a final version of federal energy legislation emerges it could contain some form of these tax incentives. UCS will continue to push for performance-based tax credits that will help make the cleanest vehicles more affordable.
As a stopgap measure, Congress recently extended the existing federal tax deduction at the original $2,000 level for fiscal year 2005. After this, the tax deduction will reduce to 75 percent and then phase out in 2006 as passed in the Working Families Tax Relief Act of 2004. While this extension will certainly help continue the promotion of hybrid technologies, it has neither the duration nor the environmental performance criteria contained in CLEAR Act language.
Bad tax breaks are a fiscal waste and send the wrong environmental message
While Congress takes small steps back-and-forth on hybrid vs. SUV tax breaks, the U.S. market has shown what course U.S. policy should take as Toyota Prius sales recently passed the Hummer H2. Given the pressing environmental and oil security issues America currently faces, wasting taxpayer money on incentives for vehicles that contribute to both problems simply does not make sense. Fully correcting that loophole and embracing a broader investment program committed to bringing more advanced, economical, and environmentally friendly vehicles to market would be a far wiser course of action.