Tax Credits for Leanest Hybrids Axed Despite Recognized Importance of the Cars

Tax Credits for Leanest Hybrids Axed Despite Recognized Importance of the Cars

By Scott Doggett, Contributor

In Washington's infinite wisdom, the tax incentives that have bolstered U.S. sales of the most fuel-efficient hybrids are gone or soon will be at a time when experts agree the vehicles could play an important role in reducing America's addiction to foreign oil and in stopping global warming.

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Honda's 42-mpg 2008 Civic Hybrid; its tax break ends next month.
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Tax incentives tied to Toyota's 2005-2008 model-year Prius, which gets a phenomenal EPA-rated 48 miles per gallon in the city, 45 mpg on the highway and 46 combined, expired in October 2007.

That same month saw the tax credit for the 2007-2008 Toyota Camry Hybrid vanish, despite the fact that model gets an EPA-rated 34 mpg combined.

And soon we'll witness another mystery: In the final minutes of next month, as people around the world usher out the old year and celebrate the new, the U.S. tax incentive for the 2006-2008 Honda Civic Hybrid (42 mpg combined!) will dissolve at the stroke of midnight.

But the strangeness won't end there.

Beginning next spring, Honda will offer a hybrid achieving a claimed 60 mpg. What tax break will Uncle Sam provide buyers of this gas-sipper, the 2010 Honda Insight? None whatsoever.

None, as in the 2,200 fewer taxpayer dollars than he's offering buyers of the 2008 Chevrolet Tahoe Hybrid right now, despite the fact that big ol' honkin' SUV achieves only 21 mpg combined.

For The Common Good

The reason why Uncle Sam offers any incentives for hybrids at all is because they tend to cost $2,000 to $7,000 more than conventionally powered cars. The Honda Civic Hybrid, for example, retails for $21,954, compared with $17,820 for a conventional Civic.

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There'll be no tax credit for Honda's 60-mpg Insight.
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The thinking was and remains that hybrids are good for America because they reduce the country's dependence on oil from nations that increasingly dislike Americans, and because they emit less carbon dioxide and other climate-changing gases, which is good for everyone.

As a result, tax credits for the purpose of boosting the sales of hybrid and other alternative-fuel vehicles were included in the Energy Policy Act of 2005 that the U.S. Congress passed and President Bush signed. The credits effectively provide discounts on these vehicles; the discounts help shorten the vehicles' payback periods for buyers.

For instance, let's say you buy a 2008 Civic Hybrid, which gets 42 mpg and currently has a $525 credit. If you drive 15,000 miles a year with gas priced at $2.91 a gallon, it will take you nearly a decade to recoup the roughly $4,000 premium you paid for the hybrid technology in the Civic Hybrid, according to a recent analysis by Edmunds.com.

Without the $525 credit, the payback period would be about a year longer, according to Edmunds. With the full $2,100 credit that initial buyers of the Civic Hybrid enjoyed, the payback period would have been only six years.

Another One Bites The Dust

When the clock strikes midnight on Dec. 31, the $525 tax credit for the 42-mpg car is kaput.

However, 16 tax incentives will exist going into the new year, in addition to the one for the Tahoe Hybrid. But of the 16, only one model (the 2007-08 Nissan Altima Hybrid) will offer fuel economy on par with the Camry Hybrid's 34 mpg. None will approach the 42 mpg of the Civic Hybrid, let alone the 46 mpg of the Prius or the claimed 60 mpg of the Insight.

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2008 Tahoe Hybrid gets $2,200 tax credit despite 21 mpg.
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Below are the 16 models, the amount of the tax credit, and the combined mpg:

2009 Ford Escape Hybrid; $3,000 2-wheel drive and $1,950 4WD; 32 mpg and 28 mpg 
2008 Ford Escape Hybrid; $3,000 2WD and $2,000 4WD; 32 mpg and 28 mpg
2009 Mercury Mariner Hybrid; $3,000 2WD and $1,950 4WD; 32 mpg and 28 mpg
2008 Mercury Mariner Hybrid; $3,000 2WD $2,200 4WD; 32 mpg and 28 mpg
2008 Mazda Tribute Hybrid; $3,000 2WD and $2,200 4WD; 32 mpg and 28 mpg
2008 Chevrolet Malibu Hybrid; $1,300; 27 mpg
2008 GMC Yukon 1500 Hybrid; $2,200 2WD and 4WD; 21 mpg and 20 mpg
2007-08 Saturn Aura Green Line; $1,300; 27 mpg
2008 Saturn Vue Green Line; $1,550; 28 mpg
2007-08 Nissan Altima Hybrid; $2,350; 34 mpg

Pretzel Logic or Linear Thinking

The tax incentives start to go away when an automaker sells its 60,000th hybrid or alternative-fuel vehicle, a level Toyota reached in mid-2006 and Honda hit in the third quarter of 2007.

The amount of the tax credit is first reduced by 50 percent before disappearing altogether over several months. Honda's tax credit, currently $525, will be phased out on Dec. 31, according to the Internal Revenue Service.

The Civic Hybrid credit had been as high as $2,100 before the phase-out began in January of this year.

In any event, many people are aware that a hybrid usually has a significant payback period and they are willing to accept it. For them, making a powerful environmental statement or being able to drive in carpool lanes legally without a single passenger is worth the cost.

Still, the built-in discount remains a lure for many shoppers. When the $3,150 tax credit on Toyota's Prius started to dwindle in October 2006, so too did its sales.

"Prius sales fell off a cliff," Earl Stewart, a Toyota dealer in Lake Park, Florida, told the Wall Street Journal recently. "It was like someone turned the faucet off."

Scott Doggett:  is an AutoObserver.com Associate Editor.