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Light-Duty Hybrid and Diesel Vehicle Tax Credits in the Energy Bill

A prominent provision of the Energy Policy Act of 2005 creates new tax credits for consumers who purchase various advanced technology vehicles, including hybrid-electric and diesel-powered cars and light trucks. The provision, which became effective in January 2006, differs from previous federal incentives for these vehicles in relying on tax credits rather than deductions, typically resulting in greater savings for consumers.

ACEEE's estimates of the credits that will be awarded to vehicles on the market today or coming soon are shown in the table below. These estimates are based on best-available information, which may include manufacturer press statements or specifications of similar models. Credit amounts for certain models have been acknowledged by the IRS; they are noted as such in the table below. Manufacturers are likely to alter vehicles in the coming years to maximize the credits they earn. [continue below...]

(Note: click on table for printer-friendly version)

Credits are available only for a limited number of vehicles per automaker. While the credits last through 2010, some automakers will exhaust their shares well before then. The provision is structured so vehicles can earn credits both for achieving greater fuel economy and for saving fuel. Fuel economy improvement is measured against a weight-dependent, model year 2002 baseline, with tiered credits starting at 25% over the baseline fuel economy. With each 25% improvement over the baseline fuel economy up to a maximum of 250%, the tax credit increases by $400.

A "conservation credit", designed to boost the amount of credit available for vehicles in the heavier weight classes, is available as well. A vehicle qualifies for the credit if it is expected to save at least 1,200 gallons over its lifetime relative to a vehicle achieving the baseline fuel economy for that weight class. For each additional 600 gallons of gasoline savings up to a maximum of 3,000 gallons, the vehicle earns $250 in tax credits.

Combining the two components, the maximum available credit is $3,400. However, once a manufacturer sells 60,000 qualifying vehicles, the tax credit is phased out over a period of fifteen months for vehicles that manufacturer produces.

Both diesels and hybrids must meet certain emissions certification levels to qualify: smaller vehicles must have a Federal emissions rating of Tier 2 bin 5 or better, and larger ones must achieve Tier 2 bin 8, a less stringent requirement. In model year 2009 for the first time, certain light-duty diesel vehicles qualify for tax credits. That is because emissions control technologies now allow diesels to meet the requirements for emissions of NOx and particulate matter. Both Mercedes and Volkswagen offer diesels eligible for tax credits in model year 2009.   

Plug-in hybrid credit

The Emergency Economic Stabilization Act of 2008 added to the tax credits introduced in EPAct 2008 one specific to plug-in hybrids. To qualify, a plug-in hybrid must have a battery of at least 4 kilowatt hours, which brings a credit of $2,500. Each kilowatt hour of battery above this adds $417 to the credit, up to a maximum of $7,500 for light-duty vehicles. Credits continue to increase with battery size for vehicles above 10,000 lbs. gross vehicle weight, reaching a maximum of $15,000 for vehicles over 26,000 lbs. gross vehicle weight. Rather than having a per-manufacturer vehicle sales limit, the plug-in credit for light-duty vehicles is capped at 250,000 vehicles for the industry as a whole. The credit expires at the end of 2014.

Credit Limitations

At this time, Toyota, Honda and Ford are the only automakers who have sold more than 60,000 qualifying vehicles. Honda models purchased after January 1, 2009 do not qualify for tax credits. Similarly, as shown in the table above, no tax credits are given to Toyota or Lexus hybrids purchased after September 30, 2007. Ford vehicles currently earn 25% of their original credit value but will cease to qualify for tax credits altogether after January 1, 2010.