Tax Incentives Reducing on Hybrids

Posted on July 2, 2008 by LCT Staff - Also by this author - About the author

LOS ANGELES – The federal government offers tax incentives that can save consumers thousands of dollars when they purchase a gas-sipping hybrid vehicle. But buyer beware: The three most popular hybrids sold in America either no longer qualify for the tax break or are about to see it reduced sharply.

On Tuesday, the tax credit on the No. 3-selling Honda Civic hybrid will be cut in half, from $1,050 to $525. It will disappear altogether at the end of the year. The credit on the top-selling Toyota Prius, once $3,150, and that for the No. 2 Toyota Camry hybrid, vanished last fall.

The Prius and Civic rank first and second in fuel economy among cars for sale in the U.S., according to the government, with combined city-highway ratings of 46 and 42 miles per gallon, respectively. The Camry hybrid has combined fuel economy of 34 mpg.

"We need to be reducing our dependence on oil, so why are we taking away something that will encourage people to do that?" asked Ailis Aaron Wolf, spokeswoman for the advocacy group 40mpg.org, which wants to raise mileage standards.

According to the 2005 federal law that established the hybrid credit, the tax break begins to phase out after a manufacturer sells 60,000 qualifying vehicles. Mainly because of heavy demand for the Prius, Toyota reached that benchmark early in the program, and tax breaks for its Toyota and Lexus brand hybrids were gone by last October.

Honda hit the limit last year, and the original $2,100 tax credit on the Civic hybrid began phasing out Jan. 1. Unlike a deduction, which lowers the amount of a person's income subject to taxation, a credit reduces the taxes owed on a dollar-for-dollar basis. In other words, a $2,100 tax credit is like getting a delayed $2,100 discount on the price of a new car. (The hybrid tax credit doesn't apply to used cars.)

So far, the diminished tax breaks don't seem to be hurting sales of either the Prius or the Civic, which are in short supply and command hefty markups at many dealerships.

"Maybe one in four of our customers even knows about the tax incentive," said Marc Canon, a spokesman for AutoNation Inc., which owns about 20 Honda dealerships nationwide. "Fuel economy is what's bringing them in."

Still, without tax breaks, it can take longer for fuel savings to make up for the added cost of a hybrid vehicle's complex gasoline-electric powertrain. For example, a 2008 Camry hybrid sells for about $4,000 more than a regular Camry, according to a new study by automotive data tracker Kelley Blue Book. With gas at $4.50 a gallon and no tax credit, it will take 6.4 years to make up the cost difference, the study found.

A competing sedan, the Nissan Altima hybrid, costs about $4,400 more than its non-hybrid version but is eligible for a $2,350 tax credit. The payback period for the Altima is 3.7 years, according to Kelley. Losing the credit also hurts the economics of buying a Prius, which continues to sell briskly even with dealer premiums of $3,000 or more tacked on.

Source: Los Angeles Times

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