Beware The Vanishing Hybrid Tax Credit

Consumer Reports cautions that buyers of popular hybrid vehicles may soon be ineligible to claim the Alternative Motor Vehicle tax credit. The credit sunsets when a manufacturer sells more than 60,000 qualifying vehicles, a figure Toyota has already reached.

The credit has already begun to phase out for Toyota and Lexus hybrids purchased after September 30, 2006, and others will follow suit as they reach the sales volume target. The 2006 Prius’ tax break, for instance, dropped in half to $1,575 if it was purchased after that date, and it will split again to $788 between April and the end of September, 2007. After that, the Prius rebate disappears altogether.

The IRS provides a list of models certified for credit. Available only to those not subject to the alternative minimum tax, the credit can be worth up to $3,150 for vehicles purchased after 2005. — CAREY GREENBERG-BERGER

Hybrid Cars and the Vanishing Tax Credit [Consumer Reports]
Hybrid Cars and Alternative Motor Vehicles [IRS]


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  1. Trai_Dep says:

    Why don’t they extend (or double) the credit, and pay for it by “incentivizing” Hummer (et al) owners correspondingly?

    If I knew that, by buying more hybrids, I’d be slugging Hummer drivers in the pocketbook, I’d hand the damn things out as birthday presents.

    As a bonus, I could watch the hand-trembling, red-faced, impotent rage on the face of every mega-SUV driver every time a hybrid passed their way.

  2. rbb says:

    Good. The sooner they get rid of the hybrid credit the better.

    All hybrids have done in the Northern VA area is to cause more congestion, pollution, more fuel consumption, and avoidance of public transportation/carpooling.

    See, VA decided to make hybrids exempt from HOV restrictions. So, instead of one car with 3 people, you have three cars with one person each. End result, more pollution, more congestion, etc.

  3. zolielo says:

    @rbb: I know what you mean. I am often in the area when I have work in DC. Limited numbers of hybrids were / are giving passes on to the HOV lanes in CA as well. Maybe “were” as the limit has been met or is close to being met.

    Also in CA hybrids have different emission inspection schedules than non-alternate fuel vehicles – I believe that this will be a problem on several levels in the future when many hybrids fall out of tune…

  4. tweaked says:

    This seems like a strange restriction. Why would the incentives be tied to manufacturer sales? Apart from whatever irritating consequences it might have had in certain regions, it seems like there’s no reason to stop encouraging people to support hybrid technologies simply because a particular manufacturer sold a certain number of cars. Bizarre. Anybody have any more profound insights into the rationale behind this legislation? Just something pushed through to avoid allegations that the law unduly supported certain manufacturers?

  5. camp6ell says:

    @tweaked: i guess the rationale is that if the manufacturer has sold 60k cars, then they’re probably making money on them (or should be) by that stage, so uncle sam no longer needs to help them out.

  6. bdgw7 says:

    Credits and other tax policies like this are a very blunt public policy tool. Because they are very obvious policies, lawmakers can easily claim credit for supporting them (i.e. supporting a very clear benefit for their constituency). At the same time, tax credits are a very particular benefit (they target a specific group of people) so they tend to address things that people have a hard time disagreeing with (e.g. education or child credits).

    If policies like this help groups that people generally consider deserving even if they don’t personally benefit (e.g. children), they can stick around for quite sometime. When they address something that gets controversial (e.g. a noble environmentally-angled policy that introduces a new technology and encourages consumers to use it for the benefit of all, and yet at the same time creates a side benefit realized by only a few very obvious manufacturers), then usually a sunset provision is attached. That way, more lawmakers will be willing to vote for it initially, even if it might not immediately & directly benefit their constituency.

    The end of the tax credit coincides with a seeming end to consumers freaking out about gas prices, and with price incentives by manufacturers now that supply for the cars is outstripping demand. If those latter two things weren’t in effect, it’s possible that the tax credit would have been extended, but from a policy-making perspective, lower gas prices and manufacturer price incentives render the need for a tax credit moot.

  7. TVarmy says:

    The real question is: Why are there still such huge tax cuts on vehicles over 3 tons that obviously are not intended for industrial/agricultural use (The purpose for that tax cut)?

  8. shiznannigan says:

    @tweaked: Campbell pretty much said it. The purpose of these tax credits are to subsidise the higher price of a hybrid (compared to a conventional auto) and get people interested in buying one. Once an automaker sells a certain amount, they have proven that the car is popular with buyers, and no longer needs to be subsidised.

    @Trai_dep: Owners of large cars, trucks, and SUVs already pay gas taxes at an increased rate (by buying/using more gas). They slug themselves in the pocketbook.

  9. Amy Alkon says:

    All hybrids have done in the Northern VA area is to cause more congestion, pollution, more fuel consumption, and avoidance of public transportation/carpooling.

    Well, this year, as a hybrid (Honda Insight owner), I’ve been even better about conserving gas (not making unnecessary trips, etc.). In 2005, I think I spent $227 on gas. Last year, I spent $157. Total. For the year. I bet Hummer drivers spend that in a week or two.

  10. TVarmy says:

    I think once plug-in hybrids and true electrics are on the market, they should get the carpool lane because they are much more efficient.

    Just because I know someone will bring up the longer tailpipe analogy, even with the pollution from power plants factored in, these cars are still better. Even a 100% coal plant is better than a gasoline engine when it comes to cars. Plus, there’s solar and wind, or you might get lucky and live near a nuclear power plant like me. Or hydroelectric, if you are really lucky.

  11. Trai_Dep says:

    Uncle Sam gives a $100,000 tax credit for buying tank-SUVs. They should at least cut into 90% of that before they consider not rewarding technologies which benefit everyone. Seems symmetrical to use one to balance the other (fiscially and karmacally).

    The problem w/ relying on the extra gas $$ paid by SUVs is that it’s dumb money – a waste in economic terms. Plus the externalities (bad air, asthma, maimed & killed soldiers, trillions wasted in countries happy to see us die).

    The small-dicked guys get woodies showing what “men” they are by dropping $120 per tank. But a hybrid owner figuratively shaking bills out of Hummer Boy’s wallet to buy their Prius would drive them c-r-a-z-y! :P

    Regards using commute lanes, I think this is a benefit that hybrids outgrew (if they ever earned it). But it doesn’t detract from the other points, IMO.

  12. goatrope says:

    My brother in DC drives a white Honda Civic – gas powered. But he put “Hybrid” badges on it, along with a small spoiler on the trunk and those goofy wheels he bought on ebay. He’s been clogging up the HOV lanes for about 14 months now.

    And trai-dep – there never was a 100K tax credit for SUVs – there was a tax deduction that expired 18 months ago, but never a credit. Huge difference.

  13. nequam says:

    @rbb: Sounds like a problem with VA’s HOV rules, rather than the number of hybrids.

  14. buenafe says:

    In California, I drive in the carpool lane often (since I carpool). During rush hours, on average I see around 10% HOV violaters (one single passenger). Most of these vehicles have heavily tinted windows.

  15. shiznannigan says:

    What’s with the assumed masculine posturing among SUV owners? Perhaps they just prefer driving a larger vehicle, and are willing to pay for the extra gas. SUVs offer the perception of safety, just as larger hybrids offer the perception of earth-friendliness. I doubt it has much to do with what one has in his (or her!) trousers.

    That said, I don’t think I’ve ever met anyone who used the supposed tax deduction in the purchase of a large SUV.

  16. nequam says:

    The tax deduction (based on accelerated depreciation) only applies to “heavy” SUVs used primarily for business. Congress capped the deduction to $25K a few years ago, but that’s still plenty and it continues to act as an incentive for small businesses. I used to wonder why I saw so many H1s on the road as promotional vehicles for local radio stations, gyms and garden centers. I suspect the tax break might explain it.

  17. John Stracke says:


    See, VA decided to make hybrids exempt from HOV restrictions.

    So, a Ford Escape (22MPG) qualifies, but a Honda Civic (40MPG) doesn’t? That’s just VA being stupid.

  18. mac-phisto says:

    like the idea of hybrids, but has anyone given any thought as to what happens when the battery needs to be replaced?!? would like to hear some feedback on that – the first gens of gas-elec hybrid should be going in for replacements about now.

  19. balagon says:

    People need to be very, very careful about figuring how much of the tax credit they’ll get, even if they don’t pay Alternative Minimum Tax. Why? Because it turns out that to get the credit, you need to figure out your taxes both the ‘regular’ way *and* under the AMT.

    Take someone who has just bought a Ford Escape Hybrid, and is expecting a nice $2600 credit. Let’s say that you do your return, and find out your taxes are $20k for the year, and that you are not subject to the Alternative Minimum Tax. Next, you have your handy dandy tax software program figure what you’d hypothetically owe under the AMT–let’s say $21,000. Guess what? You can only claim $1000 of the $2600.

    Strangely enough, dealers don’t seem to tell their customers about this little quirk.

    The maximum credit, by the way, is $4000. That’s for purchasing the ultra-clean Honda Civic GX, which runs on natural gas.

  20. Morton Fox says:

    What I need to figure out is what does the HOV lane have to do with vehicle emissions? The car still takes up the same amount of space on the road.

  21. zarchitect says:

    When I lived in SD not too long ago, I also saw way too many single-driver hybrids in the HOV lanes… quite silly as it DID deafeat the purpose of reducing congestion or clean the air (hybrids are not THAT efficient on the highway…) Now I live in Cincinnati (don’t ask) and here they did away with the smog check… So now every rusty bucket Ford F250 extended cab became resurrected from the hay-fields because now they were “legal” to drive again… going backwards? yes. The point is this. Hybrid is SO new to the (scared from something new) public that I could see them try to give every incentive possible to showcase the “good” in something so fresh of a technology. The HOV thing is stupid but I could see it as a marketing thing… It’s stupid, but so is most of the scared public. The EPA-crap here, that’s REALLY stupid! That’s just politics. “Vote for me, I saved you $50/year! Your child has severe asthma now, but vote for me anyway!” Again, brainwashed public. The only ONLY reason I could see the smog-check not being required here is that car-turnover here is higher as most rust out… but from what I see on the streets, that theory is shot…

  22. zolielo says:

    In a related tv news segment in CA the number of stickers (85K) has been met so new hybrid owners cannot drive in the HOV lane.

    What I found interesting is that the resale on a hybrid with the HOV stickers is estimated at $4,000 more than a comparable non-stickered hybrid.