Tax Preferences for Sport Utility Vehicles (SUVs): Current Law and Legislative Initiatives in the 109th Congress

Congressional research reportApr 4, 2006

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Tax Preferences for Sport Utility Vehicles

(SUVs): Current Law and Legislative

Initiatives in the 109th Congress

(name redacted)

Analyst in Public Finance

April 4, 2006

Congressional Research Service

7-....

www.crs.gov

RL32173

CRS Report for Congress

Prepared for Members and Committees of Congress

Tax Preferences for Sport Utility Vehicles (SUVs)

Summary

The surge in domestic popularity of large sport utility vehicles (SUVs) since the early 1990s has

stirred a debate over what steps the federal government should take, if any, to mitigate their

effects on the environment, highway safety, traffic congestion, and U.S. dependence on foreign

sources of oil. Legislative activity in the 108th Congress expanded the scope of the debate to

include the ways in which the federal tax code encourages the purchase of heavy-duty SUVs,

primarily for business use. In May 2003, Congress passed a measure (the Jobs and Growth Tax

Relief Reconciliation Act of 2003) that raised the maximum expensing allowance under section

179 of the Internal Revenue Code (IRC) for these vehicles to $100,000 from May 2003 through

the end of 2005; the American Jobs Creation Act of 2004 lowered the allowance to $25,000, as of

October 22, 2004.

This report examines current federal tax preferences for SUVs and legislation in the 109th

Congress that would alter them. It will be updated to reflect subsequent legislative activity

addressing the preferences.

One way in which the federal tax code can influence the purchase of heavy-duty SUVs for

business use is through the tax treatment of depreciation for these vehicles. Under current tax law,

the depreciation of passenger cars is treated less generously than that of light trucks (including

many SUVs). Passenger cars, which are defined as motor vehicles weighing 6,000 pounds or less,

are considered so-called listed property—and thus subject to annual limits on depreciation

allowances. By contrast, light trucks, which are defined as motor vehicles weighing more than

6,000 pounds (with some exceptions), are generally depreciated under a different and more

favorable set of rules. For example, SUVs considered light trucks are eligible for a maximum

expensing allowance of $25,000 in the 2005 tax year, but the maximum first-year depreciation

allowance in the same year for a passenger car under IRC section 280F is $2,960. As a result, a

business taxpayer can realize a greater reduction in the after-tax cost of a vehicle by purchasing a

heavy-duty SUV instead of a passenger car of comparable value.

The federal tax code also encourages the purchase of heavy-duty SUVs by excluding them from

the gas guzzler excise tax. The tax is levied on domestic sales of new automobiles with relatively

poor fuel economy ratings. It is paid by manufacturers and importers. All light trucks, including

all SUVs, are exempt from the tax.

Several legislative proposals in the 109th Congress would curtail the tax preference for heavyduty SUVs embedded in current depreciation rules. Specifically, four bills—H.R. 4384, H.R.

4409, S. 1852, and S. 2025—would erase this preference by subjecting all SUVs with a gross

weight of more than 6,000 pounds to 14,000 pounds to the annual depreciation limits for

passenger cars under IRC section 280F. Two other bills—H.R. 2070 and S. 2345—take an

indirect approach to lessening this tax preference.

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Tax Preferences for Sport Utility Vehicles (SUVs)

Contents

Domestic Demand for SUVs and the Debate Over Their Welfare Effects .....................................2

Depreciation of Motor Vehicles Under the Federal Tax Code.......................................................4

Depreciation of SUVs Under the Federal Tax Code .....................................................................7

Accelerated Depreciation and Demand for Heavy-Duty SUVs.....................................................9

Gas Guzzler Excise Tax ............................................................................................................ 12

The Gas Guzzler Tax and the Demand for Heavy-Duty SUVs ................................................... 12

Legislative Initiatives in the 109th Congress to Curtail or Eliminate SUV Tax Preferences ......... 13

Tables

Table 1. First-Year Depreciation Deductions and Present Value of Total Depreciation

Deductions and Total Tax Savings for a Large SUV and a Passenger Car Placed in

Service in 2005 ...................................................................................................................... 10

Contacts

Author Contact Information ...................................................................................................... 14

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mericans have developed a love/hate relationship with sport utility vehicles (SUVs).

Some view them as a symbol of profligate consumption and reckless disregard for

highway safety, environmental protection, and fuel economy. For others, they represent a

triumph of automotive engineering and design, one that is manifested in their unrivaled

combination of ample storage space, enhanced passenger safety, towing capability, bold styling,

and freedom to explore rugged terrain that is inaccessible for the average passenger car. In the

decade ending in 2003, SUVs became a conspicuous presence on American roads, streets, and

highways, as their sales and average size and weight steadily increased.

Although many SUV owners use them as they would a passenger car, there are some notable

differences in design and performance between the typical SUV and the typical passenger car.

Generally, SUVs tend to be taller and boxier. Many are built on the rigid chassis of a pick-up

truck, giving them a relatively high clearance between the road surface and the undercarriage.

Partly because SUVs tend to have a higher center of gravity than passenger cars, their ride feels

bumpier and more like that of a truck, despite the availability of the same luxury options found in

many automobiles. The increasing popularity of so-called crossover SUVs, which combine some

of the attributes and looks of an SUV with the ride and handling of a passenger car, raises the

possibility that over time the differences between the typical SUV and the typical passenger car

will lessen.1

Concern over the effects of SUVs on air quality, highway safety, and fuel consumption has

spawned a continuing debate over whether the federal government should subject these vehicles

to more stringent regulatory standards for safety and fuel economy. Legislative activity by the

108th Congress expanded the scope of debate to include the ways in which federal tax policy

affects the demand for heavy-duty SUVs.

In passing the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA, P.L. 108-27),

the 108th Congress hoped to achieve a variety of policy objectives, including faster growth in

domestic business investment and job creation. Congressional debate over the measure gave no

indication, however, that boosting domestic demand for heavy-duty SUVs was one of these

objectives. Yet a provision in JGTRRA intended to stimulate small business investment in

machinery and equipment (including most motor vehicles) and packaged software appeared to

have such an effect. The provision made the expensing allowance under section 179 of the

Internal Revenue Code (IRC) more generous in 2003 through 2005.

Not surprisingly, producers of heavy-duty SUVs and their dealers welcomed the stimulus. At the

time JGTRRA was enacted, both parties were earning sizable profit margins on domestic sales of

such vehicles.2

But not everyone was pleased that the newly enhanced expensing allowance applied to large

SUVs. SUV critics labeled it an “SUV tax loophole” that would be likely to stimulate increased

sales of the vehicles. To forestall such an outcome, they requested that the allowance be modified

so that heavy-duty SUVs no longer qualified for it. According to critics, the federal government

was not protecting or promoting the public interest by granting a tax subsidy for the purchase of

See Brett Clanton, “Large SUVs Lose Luster; Cost Big 3,” Detroit News, January 16, 2005, p. 1A; and Christine

Tierney, “Party’s Over for Large SUVs as Tastes Shift,” Detroit News, December 9, 2005, p. 1A.

See Robert Schoenberger, “Excursion May Get Stay of Execution; High Profit Margin Offsets Low Unit Sales,” The

Courier-Journal, October 29, 2003, p. 1F.

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motor vehicles intended for business use that, in their view, received poor gas mileage, emitted

high concentrations of air pollutants, and posed significant safety hazards to their own occupants

and to passengers in other vehicles.3

Evidently, the 108th Congress paid attention to these objections, for it included a provision to

curtail the preference in the final tax bill it passed, the American Jobs Creation Act of 2004

(AJCA, P.L. 108-357). Under the provision, the expensing allowance for SUVs not subject to the

depreciation limitations for passenger cars under IRC section 280F was limited to $25,000 for

SUVs placed in service after October 22, 2004.

This report examines how the federal tax code treats the purchase of heavy-duty SUVs for

business use and discusses proposals in the 109th Congress that would further change this

treatment. Two statutory provisions make up the core of the report: the expensing allowance

under IRC section 179 and the “gas guzzler” excise tax on domestic sales of new automobiles

under IRC section 4064.

Domestic Demand for SUVs and the Debate Over

Their Welfare Effects

Sport utility vehicles are classified as light trucks in existing data on domestic motor vehicle sales

and production. In 2004, U.S. motor vehicles sales totaled 17.299 million units.4 Of that number,

light trucks accounted for 54%, followed by passenger cars (43%) and medium and heavy trucks

(2.5%). Sales of light trucks exceeded those of passenger cars for the first time in 2001. In 1992,

by contrast, the share of passenger cars was nearly double that of light trucks: 63% to 35%.

Propelling the sharp rise in the light-truck share of domestic motor vehicle sales from the early

1990s through the early 2000s was the increasing popularity of SUVs. U.S. sales of SUVs

jumped from less than 1 million units in the early 1990s to around 4.5 million units in 2003.5

Automobile manufacturers contributed to this growth by spending large sums on developing,

producing, and marketing these vehicles. 6 As one might expect, this investment was driven by the

prospect of reaping substantial profits. In 1998, the Ford Motor Company reportedly earned about

$2.4 billion in after-tax profits from sales of just two of its SUV lines, the Expedition and

Navigator.7 An analyst estimated that an SUV with a 2003 sticker price of $50,000 might yield a

profit of $20,000 or more, whereas the profit on a minivan would be about one-tenth as much.8

See Aileen Roder and Lucas Moinester, “A Hummer of a Tax Break,” Taxpayers for Common Sense (Washington:

January 23, 2003); Pamela Najor, “Tax Cut Bill ‘Bad Policy’, Group Says, Creating Perverse Incentives for SUVs,”

Daily Report for Executives (Washington: Bureau of National Affairs, May 28, 2003), p. G-7; and “Make FuelEfficient SUVs a Go, But Stop Tax Break,” editorial, Atlanta Journal-Constitution, October 27, 2003, p. 10A.

Standard & Poor’s, Industry Surveys: Autos & Auto Parts (New York: December 22, 2005), p. 3.

Brett Clanton, “SUV Glut Signals Dip in Interest,” Detroit News, August 13, 2004, p. A1.

Spending on SUV advertising in the United States rose from $172.5 million in 1990 to $1.51 billion in 2000. See

Keith Bradsher, High and Mighty (New York: Public Affairs, 2002), p. 112.

Ibid., p. 89.

Jonathan Weisman, “Businesses Jump on an SUV Loophole; Suddenly $100,000 Tax Deduction Proves a Marketing

Bonanza,” Washington Post, November 7, 2003.

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Growth in domestic sales of SUVs appears to have slackened in both 2004 and 2005, though a

lack of data from public sources makes it difficult to gauge the extent of the slowdown. During

that period, what might be described as a growing split emerged within the domestic SUV market

between full-size or heavy-duty SUVs and crossover SUVs. Sales of the former have been falling,

while sales of the latter have been rising. In 2005, for example, U.S. purchases of large SUVs

were 13.1% below the level in 2004, whereas purchases of crossover SUVs increased 13.5%.9 A

variety of factors explain the drop in sales of full-size SUVs. Foremost among them are the

advanced age of the design of the current crop of large SUVs, and changing tastes among car

buyers—driven partly by a rising concern about excessive energy consumption and the upward

spike in gasoline prices in 2004 and 2005. Nonetheless, at least one market research firm, J.D.

Power and Associates, is predicting a rebound in domestic sales of large SUVs in 2006 and 2007

to levels seen in 2001 to 2003, driven by the advent of new models of full-size SUVs offering

improved fuel economy. 10

The enormous growth in domestic ownership of SUVs since the early 1990s has fueled a lively

debate over their effects on highway safety, air quality, and U.S. reliance on foreign sources of

crude oil and petroleum products, among other concerns.11 Critics charge that SUVs, especially

the full-size models, wastefully consume gasoline, contribute more to air pollution and global

warming than passenger cars, and pose a significant threat to the safety of their own passengers—

as well as other people on the road. Owners of the vehicles retort that large SUVs offer greater

protection to passengers than do smaller vehicles and are much safer than critics contend. They

also argue that in a democratic society with a free-market economy, consumers should be allowed

to own heavy-duty motor vehicles if they value personal safety more than gas economy.

Sorting fact from fiction in the debate about the welfare effects of SUVs can be a challenge. A

careful review of the literature on these effects reveals that SUVs have accounted for an

increasing share of total fuel consumption and emissions by motor vehicles in the past decade or

so. On average, their gas mileage has been lower, their emissions of carbon monoxide and

nitrogen oxides higher, and their risk of rolling over in an accident greater than most passenger

cars.12 In addition, compared to passenger cars, SUVs face less stringent federal standards for fuel

economy and emissions, and their safety record is thought to receive less scrutiny from federal

agencies.13 But several public announcements in recent years by both federal regulatory agencies

and manufacturers of SUVs hold the promise that these discrepancies might shrink or disappear

in coming years.14

Karen Lundegaard, “A New Generation of SUVs; Sales of ‘Crossovers’ Expected to Outstrip SUVs This Year; Latest

Models Get Wider and Longer,” Wall Street Journal, January 10, 2006, p. D1.

Standard & Poor’s, Autos & Auto Parts, p. 10.

For an overview of the principal arguments made by proponents on both sides of this debate, see Cooper, “SUV

Debate,” pp. 451-461; Gregg Easterbrook, “America’s Twisted Love Affair With Sociopathic Cars,” New Republic,

vol. 228, January 20, 2003, pp. 27-34; and Sam Kazman, “Is Big Bad?: SUV Critics Hold Consumers in Contempt,”

Reason, August/September 2003, available at http://www.cei.org.

Cooper, “SUV Debate,” pp. 453-458.

See Cooper, “SUV Debate,” p. 454; and CRS Report RS20298, Sport Utility Vehicles, Mini-Vans, and Light Trucks:

An Overview of Fuel Economy and Emissions Standards, by (name redacted).

The Environmental Protection Agency issued a final rule in February 2000 that beginning with the 2009 model year

(MY), all light trucks, including SUVs, will be held to the same emissions standards as passenger cars (see 65 Federal

In addition, in December 2002, the National Highway Traffic Safety Administration (NHTSA) proposed that starting

with MY2005, all light trucks, including SUVs, will be subject to higher fuel economy standards. Under the rule, their

(continued...)

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Depreciation of Motor Vehicles Under the Federal

Tax Code

A logical starting point for an examination of how the federal tax code affects the purchase of

heavy-duty SUVs is the tax treatment of depreciation for motor vehicles in general and passenger

cars in particular. Within this treatment lies the most important tax subsidy for the purchase of

these SUVs for business use. It is difficult to comprehend the nature of this subsidy without

having a good grasp of the current rules for recovering the cost of motor vehicles bought mainly

for business use.

In general, business taxpayers—C corporations, shareholders of S corporations, members of

partnerships and limited liability corporations, and sole proprietors—are allowed to deduct all

ordinary and necessary expenses they incur in determining their taxable income in a particular tax

year. One such expense is depreciation, which represents the decline in the economic value of

tangible and intangible business assets resulting from wear and tear and obsolescence. Under

current tax law, the cost of a depreciable asset such as a building, patent, light truck, or machine

tool is recovered over a specified period (known as the asset’s tax life) using an allowable method

of depreciation (e.g., the straight-line or double-declining balance methods). 15 This period may or

may not match an asset’s actual useful life, which is often difficult to gauge.

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average fuel economy would rise from the current requirement 20.7 miles per gallon (mpg) to 21.0 mpg in MY2005,

21.6 mpg in MY2006, and 22.2 mpg in MY2007 (see 67 Federal Register 77015-77029, December 16, 2002). NHTSA

announced in April 2003 that the rule had been adopted.

On March 29, 2006, NHTSA released a final rule setting new and higher fuel economy standards for light-duty trucks

in the model years from 2008 to 2011. Under the rule, the current corporate average fuel economy (CAFÉ) standards

for light trucks are revised so that they cover vehicles (including SUVs) weighing up to 10,000 pounds; the previous

standards applied to light trucks that weighed up to 8,500 pounds. Pickup trucks weighing more than 8,500 are exempt

from the new standards. The new standards depend on a vehicle’s size, as measured by its so-called footprint, which is

the product of multiplying the vehicle’s wheelbase by its track width. Light trucks with smaller footprints have higher

standards than larger footprints. Manufacturers of light trucks have the choice of complying with the revised CAFÉ

standards or the previous standards during the transition period of MY2008 to MY2010. Starting in MY2011, all

manufacturers must comply with the revised standards.

Finally, in early December 2003, 15 automobile makers from four nations voluntarily agreed to redesign the SUVs and

pick-up trucks they sell in the United States to make them less dangerous to the occupants of passenger cars. The

announced design changes are to be phased in so that all MY2010 light trucks will incorporate them. Many of the

largest SUVs and pick-up trucks sold domestically will need to be redesigned. Because the action is being taken

voluntarily, it is unclear what role federal regulatory agencies will play in the redesign effort. (See Danny Hakim,

“Automakers to Redesign S.U.V.’s to Reduce Risks,” New York Times, December 4, 2003, p. A1; and Lorrie Gilbert,

“Automakers Announce Plans to Improve Designs for Vehicle Occupant Protection,” Daily Report for Executives,

Bureau of National Affairs, December 5, 2003, p. A-37.)

Generally, most depreciable tangible assets placed in service after 1986 are depreciated under a system known as the

Modified Accelerated Cost Recovery System (MACRS). Under MACRS, the cost of an asset is recovered by applying

the proper depreciation method, the proper recovery period, and the proper convention. A taxpayer may choose to use

the straight-line method, which involves writing off the same amount of the asset’s acquisition cost in each year of its

recovery period; its basic rate is equal to one divided by the number of years in the recovery period. Otherwise, the cost

of assets in the 3-, 5-, 7-, and 10-year classes is recovered using the 200% or double-declining balance method. Under

this method, the basic rate of depreciation is simply twice that of the straight-line method. The cost of assets in the 15and 20-year classes is recovered using the 150% declining balance method, whose basic rate is 1.5 times larger than

that of the straight-line method. Longer-lived assets must be depreciated using the straight-line method.

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Tax Preferences for Sport Utility Vehicles (SUVs)

Usually in a bid to spur increased business investment, governments sometimes permit business

taxpayers to recover the cost of specified depreciable assets well before their economic value has

been exhausted. Such an acceleration in the rate of depreciation for tax purposes encourages firms

to invest more in the favored assets than they otherwise would, setting the stage for faster

economic growth in the short term. But the economic gains arising from accelerated depreciation

often come with significant economic costs. Specifically, such depreciation distorts the allocation

of economic resources by encouraging investment in favored assets at the expense of other assets

offering higher pre-tax rates of return on investment, and into industries that intensively use the

tax-favored assets at the expense of other industries where pre-tax rates of return on investment

may be higher. Accelerated depreciation has these unwanted efficiency effects mainly because it

lowers the user cost of capital for investment in favored assets relative to the user cost of capital

for investment in other assets, all other things being equal.

The cost of most tangible depreciable business assets placed in service after 1986 is recovered

under what is known as the Modified Accelerated Cost Recovery System (MACRS). Under this

system, which was put in place by the Tax Reform Act of 1986 (P.L. 99-514), new and used

automobiles and light trucks (including SUVs, vans, and minivans) used primarily in a trade or

business are assigned a recovery period of five years. Their cost may be recovered under any of

the allowable depreciation methods, the most advantageous of which is the double-declining

balance method. Nevertheless, as is explained below, an exception to this treatment is made for

passenger cars used primarily in a trade or business that are regarded as luxurious under the

federal tax code.

Except for luxury passenger cars, the cost of motor vehicles bought mainly for business use may

also be expensed under section 179 of the Internal Revenue Code (IRC).16 Generally, expensing

involves writing off or deducting the full cost of a depreciable asset in the year when it is placed

into service, regardless of the asset’s useful life. As a result, expensing is the most accelerated

form of depreciation. Owing to changes in section 179 made by JGTRRA and AJCA, business

taxpayers may expense in a single tax year more than $100,000 of the cost of qualified assets

placed in service from 2003 through 2007.17 Before JGTRRA, the maximum expensing

allowance in that period was set at $25,000. With a few minor exceptions, qualified assets are

defined as new and used business machines and equipment (including most motor vehicles) and

packaged or off-the-shelf software used in the active conduct of a trade or business. The amount

that a business taxpayer may expense is subject to two important limitations: a dollar limitation

and an income limitation. Under the dollar limitation, the maximum expensing allowance is

reduced, dollar for dollar, by the amount by which the total cost of qualified property placed in

service in a tax year exceeds a phase-out threshold of more than $400,000 from 2003 through

2007.18 The threshold was fixed at $200,000 in that period before the enactment of JGTRRA.

Under the income limitation, the expensing allowance cannot exceed the taxable income a

taxpayer earns from the active conduct of the trade or business in which the qualified assets are

For more details on the expensing allowance, see CRS Report RL31852, Small Business Expensing Allowance:

Current Status, Legislative Proposals, and Economic Effects, by (name redacted).

This amount is indexed for inflation in 2004 through 2007. As a result, the maximum expensing allowance for firms

operating outside enterprise and empowerment zones and other designated areas was $102,000 in 2004 and $105,000 in

2005.

This amount is also indexed for inflation in 2004 through 2007. As a result, the phase-out threshold for firms

operating outside enterprise and empowerment zones and other designated areas was $410,000 in 2004 and $420,000 in

2005.

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employed. Assuming no change in current law, the maximum expensing allowance will revert to

$25,000 and the phase-out threshold to $200,000 in 2008 and beyond.

The expensing allowance is regarded as an investment tax subsidy for smaller firms for a simple

reason: the phase-out threshold effectively restricts use of the allowance to firms that are

relatively small in asset, employment, or revenue size.

In addition, new (but not used) motor vehicles used primarily in a trade or business were among

the business assets that qualified for temporary first-year depreciation deductions of 30% under

the Job Creation and Worker Assistance Act of 2002 (JCWAA, P.L. 107-147) and 50% under

JGTRRA. The 30% deduction applied to qualified property acquired after September 10, 2001,

and before January 1, 2005, and placed in service before January 1, 2005;19 the 50% deduction

applied to the same set of assets acquired after May 5, 2003, and before January 1, 2005, and

placed in service before January 1, 2005. Business taxpayers could claim either deduction, but not

both. In effect, they operated as partial expensing allowances, and firms of all asset, employment,

or revenue sizes and forms of legal organization were able to benefit from them.

Although the depreciation of motor vehicles in general is governed by the rules of the MACRS

and the expensing allowance, the cost of so-called luxury passenger cars used primarily for

business is recovered under a different set of rules. More specifically, the depreciation allowances

for those cars are subject to annual limits under IRC section 280F, limits that may extend the tax

life of a passenger car far beyond five years. This statutory provision, which entered the federal

tax code through the Deficit Reduction Act of 1984 (P.L. 98-369), establishes a separate category

of tangible depreciable assets known as listed property. In general, listed property embraces assets

whose nature or purpose makes it possible to use them for both business and personal purposes.

Under current law, passenger cars and other transportation equipment; property used in

entertainment, recreation, or amusement; computers and peripheral equipment; and cellular

telephones and similar telecommunications equipment are considered listed property. There are

specific dollar limits on the depreciation allowances that may be claimed for each type of listed

property in a single tax year, assuming business use accounts for 50% or more of total use of the

property. 20 If business use accounts for 100% of a listed property’s use, then the maximum

depreciation allowance may be claimed for a tax year. But if business use represents less than

100% of the property’s use, then the depreciation allowance must be adjusted to reflect the

business share of total use.21

In the case of luxury passenger cars, the limits under IRC section 280F represent the maximum

depreciation deductions that may be claimed under a combination of the MACRS, the IRC

The 30% and 50% temporary depreciation allowances were available for new assets that were depreciable under the

MACRS and had recovery periods of 20 or fewer years. They also applied to water utility property, computer software

that was depreciable over three years under IRC Code 167, and qualified leasehold improvements.

Some property can be placed in service in 2005 still qualify for the allowances. Specifically, the property must be

produced by a business taxpayer and subject to the uniform capitalization rules under IRC Section 263A, have a

production period of more than two years or more than one year and a cost exceeding $1 million, and have a recovery

period under the MACRS of at least 10 years or be used in the business of transporting people for hire.

If business use of listed property drops below 50% of total use, the property must be depreciated under the MACRS

alternative depreciation system (ADS), which tends to be much less generous than the regular MACRS. Property whose

cost is recovered under the ADS is not eligible for the 30% or 50% temporary first-year depreciation allowances under

JCWAA and JGTRRA, respectively.

For example, if the business share of total use for a passenger car is 75%, then the depreciation deduction that may be

claimed in a particular tax year is 75% of the maximum allowed under IRC section 280F.

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section 179 expensing allowance, and the temporary 30% and 50% first-year depreciation

deductions established by JCWAA and JGTRRA (if applicable). For example, a business taxpayer

may claim a maximum first-year depreciation allowance of $10,610 (if he or she claims the 50%

bonus depreciation) for a new passenger car placed in service in 2004; the maximum first-year

allowance falls to $2,960 for a new passenger car placed in service in 2005, when the bonus

depreciation no longer was available.22 Higher limits apply to electric passenger vehicles built by

an original equipment manufacturer and placed in service after August 5, 1997, and before

January 1, 2007: the maximum first-year allowance for such a vehicle placed in service in 2005 is

$8,880.

The limits went into effect in 1984 and have been adjusted for inflation since 1988. Although

their original intent was to discourage the purchase of expensive cars for business use, the limits

no longer effectively serve this purpose because they have not kept pace with increases in the cost

and improvements in the quality and design of passenger cars.23 The federal tax code does not

define a luxury passenger car; instead, the worth of such a vehicle is determined on the basis of

the total depreciation allowances under IRC section 280F during the first five years a passenger

car is used for business purposes. For example, any passenger car placed in service in 2005 whose

purchase price was $13,860 or more was deemed a luxury car under IRS regulations.

Depreciation of SUVs Under the Federal Tax Code

The tax treatment of depreciation for an SUV hinges on the vehicle’s weight and design.

Depending on its weight and the type of chassis upon which it is built, an SUV may be

classified—for tax purposes—as either a passenger car or a light truck. This distinction is hardly

trivial, as it can affect the number of tax years required to recover the cost of an SUV and the

after-tax cost of the vehicle.

As discussed in the previous section, current federal tax law imposes annual limits on

depreciation allowances for luxury passenger cars. The tax code defines passenger cars as fourwheeled vehicles built on a car chassis and made primarily for use on public streets, roads, and

highways and having an unloaded gross vehicle weight (i.e., curb weight fully equipped for

service but without passengers or cargo) of 6,000 pounds or less. Under this definition, trucks,

vans, minivans, and SUVs built on an automobile chassis with a gross vehicle weight (i.e.,

maximum total weight of a loaded vehicle as specified by the manufacturer) of 6,000 pounds or

less should be subject to the same depreciation limits as passenger cars. But this is not the case

for all such vehicles. Trucks (including SUVs) and vans placed in service after July 7, 2003,

weighing 6,000 pounds or less, and built on a car chassis are exempt from the depreciation limits

for passenger cars if they satisfy the requirements for a “qualified personal use vehicle.” Such a

vehicle is defined as a truck or van that has been modified in such a way that it is unlikely to be

used for personal purposes. Examples of such vehicles are marked police or fire vehicles, delivery

trucks with seating only for the driver, flatbed trucks, and refrigerated trucks.24 A different set of

See IRS Revenue Procedure 2005-13.

See U.S. Congress, Joint Committee on Taxation, General Explanation of the Revenue Provisions of the Deficit

Reduction Act of 1984, JCS-41-84 (Washington: GPO, 1985), pp. 559-560.

See Temporary Reg. §1.275-5T(k). Under temporary rules (T.D. 9069) issued by the Internal Revenue Service on

July 7, 2003, certain vans and light trucks weighing 6,000 pounds or less have not been treated as passenger cars for tax

purposes since the 2003 tax year. More specifically, the exclusion applies to vans and light trucks that are modified for

business use in a way that precludes any personal use. The rules were issued in response to numerous complaints from

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depreciation caps under IRC section 280F applies to light trucks (including SUVs), minivans, and

vans weighing 6,000 pounds or less built on a truck chassis and placed in service after 2002.25

These caps are higher than the ones for passenger cars: for such a light truck placed in service in

2005, the maximum first-year depreciation allowance is $3,260, compared to a first-year

allowance of $2,960 for passenger cars.

SUVs, trucks, vans, and minivans built on a truck chassis with a gross vehicle weight of more

than 6,000 pounds are considered light trucks for tax purposes and thus exempt from the

depreciation limitations for luxury passenger cars under IRC section 280F.26 The exemption

originated with the Deficit Reduction Act of 1984 and was initially intended to allow owners of

heavy-duty working vehicles used in farming or construction or other trades or businesses to

recover the cost of these vehicles much faster than would be possible under IRC section 280F.

Business taxpayers owning vehicles eligible for the exemption can recover their cost under the

regular depreciation rules for motor vehicles. This means, in the case of a business owner who

bought a light truck and placed it in service in 2005, that the owner may claim a depreciation

allowance based on the rules of the IRC section 179 expensing allowance and the MACRS. As

noted above, small business owners, including self-employed individuals, are the taxpayers most

likely to claim the expensing allowance.

A provision of AJCA modified IRC section 179 to limit the expensing allowance that may be

claimed for SUVs built on a truck chassis with a gross vehicle weight of more than 6,000 pounds.

Specifically, it limits the amount of the cost of SUVs with a gross vehicle weight of more than

6,000 pounds and less than 14,000 pounds that may be expensed to $25,000.27 This limitation

applies to vehicles placed in service after October 22, 2004. Under the provision, SUVs are

defined as any four-wheeled vehicle designed mainly “to carry passengers over public streets,

roads, or highways” that are exempt from the depreciation caps under IRC section 280F and

whose gross vehicle weight does not exceed 14,000 pounds. Because this definition could apply

to many pickup trucks, vans, and small buses, the provision further refines it so that many of

these vehicles are eligible for the regular expensing allowance of over $100,000.28 Despite this

refinement, it appears that pickup trucks with a cargo bed of less than six feet and weighing more

than 6,000 pounds and most passenger vans weighing more than 6,000 pounds are subject to the

$25,000 limit.

(...continued)

small business owners that current dollar limits on depreciation deductions for passenger cars were making it

impossible to write off the cost of a basic model van or light truck in the five years permitted under MACRS.

See IRS Revenue Procedure 2003-75.

SUVs belonged to this category of vehicles before the enactment of the American Jobs Creation Act of 2004.

Under JGTRRA, the maximum expensing allowance for SUVs weighing more than 6,000 pounds was not less than

$100,000. So any such SUV bought and placed in service from January 1, 2004, through October 22, 2004, was eligible

for that allowance. AJCA reduced it to the amount that was in effect in 2003 before the enactment of JGTRRA.

The following vehicles are excluded from the definition of SUVs under IRC Section 179(b)(6)(B)(i) and thus not

subject to the limitation it imposes on the expensing allowance for heavy-duty SUVs: (1) those designed to have a

seating capacity of more than nine persons behind the driver’s seat; (2) those equipped with a cargo area of at least six

feet in length that is an open area and is not readily accessible from the passenger compartment; (3) those equipped

with a cargo area of at least six feet in interior length that is designed for use as an open area but is enclosed by a cap

and is not readily accessible directly from the passenger compartment; and (4) those with an integral enclosure

spanning the driver compartment and load-carrying device, no seating behind the driver’s seat, and no body section

protruding more than 30 inches ahead of the leading edge of the windshield.

Congressional Research Service

Tax Preferences for Sport Utility Vehicles (SUVs)

Accelerated Depreciation and Demand for HeavyDuty SUVs

How does the current tax treatment of depreciation for motor vehicles affect domestic demand for

SUVs? This question cannot be answered with precision because of the many factors that

influence sales and the difficulty of isolating the effects of a single factor. Nonetheless, there is no

question that current depreciation rules favor the purchase of heavy-duty SUVs over lighter SUVs

or passenger cars of comparable value. Supporting evidence can be found in the greater tax

benefit to business taxpayers from buying an SUV exempt from the depreciation caps on luxury

passenger cars than from buying a vehicle subject to those caps. This added benefit stems from

the accelerated depreciation for heavy-duty SUVs available under IRC section 179. The

allowance for these vehicles expanded under JGTRRA but contracted under AJCA to what it was

when JGTRRA was enacted.

The figures in Table 1 illustrate the greater tax benefit from purchasing a large SUV for business

use. It can be seen in a comparison of the maximum first-year depreciation deductions and the

present value of total depreciation allowances (in 2005 dollars)—and the present value of the tax

savings associated with these allowances—a non-corporate business taxpayer is allowed to claim

as a result of placing in service in 2005 a new SUV weighing over 6,000 pounds but not more

than 14,000 pounds, or a new passenger car of equal value.29 The comparisons are made under the

depreciation rules that were in effect both before and after the enactment of AJCA. In computing

the depreciation deductions, it is assumed that each vehicle is driven solely for business purposes,

the taxpayer earned at least $40,000 in 2005 from the trade or business in which the vehicle is

used, and the double-declining balance method of depreciation with the half-year convention is

used. In computing the present value of the total depreciation allowances claimed for each vehicle

and the associated tax savings, it is further assumed that the discount rate is 4.3, which was the

average rate for 10-year Treasury bonds in 2005.

Comparing first-year depreciation allowances offers a useful frame of reference because the tax savings caused by

accelerated depreciation depends on the proportion of an asset’s acquisition cost recovered in the first year or two of its

tax life. These benefits increase as the proportion expands and a depreciable asset’s tax life shrinks. The fundamental

reason lies in the time value of money and the tax deferral made possible by accelerated depreciation: tax savings

realized today are more valuable than the same amount of tax savings realized over five or 10 years.

Congressional Research Service

Tax Preferences for Sport Utility Vehicles (SUVs)

Table 1. First-Year Depreciation Deductions and Present Value of Total Depreciation

Deductions and Total Tax Savings for a Large SUV and a Passenger Car Placed in

Service in 2005

Vehicle

New Heavy-Duty SUV

New

Passenger

Car

Assumed Curb Weight (pounds)

6,400

3,200

Purchase Price

$40,000

Under the American

Jobs Creation Act of

2004b

Under the Jobs and Growth Tax

Relief Reconciliation Act of 2003c

$2,960

$28,000

$40,000

Years Required to Recover the

Acquisition Costd

Present Value of Total

Depreciation Deductions (2005

dollars)e

$37,327

$38,351

$27,638

Present Value of Total Tax

Savings (2005 Dollars)e

13,064

13,423

9,670

After-Tax Cost of the Vehiclef

26,936

26,577

30,330

Maximum First-Year

Depreciation Allowancea

Source: Congressional Research Service

The passenger car is subject to annual limits on depreciation deductions under IRC Section 280F. The SUV

is not subject to any such limits and thus is eligible for the maximum expensing allowance allowed under

IRC section 179, and the regular depreciation allowance under the MACRS.

The figures in this column reflect the current limit of $25,000 on the maximum expensing allowance in a

single tax year for an SUV with a gross vehicle weight of over 6,000 pounds but less than 14,000 pounds.

This limit was established by the American Jobs Creation Act of 2004.

The figures in this column reflect the limit of $102,000 on the maximum expensing allowance in 2004 for

SUVs with a gross vehicle weight of more than 6,000 pounds. This limit was in effect before the enactment

of the American Jobs Creation Act of 2004.

According to IRS Revenue Procedure 2005-13, the maximum depreciation allowance in 2005 for a

passenger car placed in service that year was $2,960, followed by $4,700 in 2006, $2,850 in 2007, and

$1,675 in each succeeding year. The SUV is depreciated using the double-declining balance method with a

half-year convention.

In estimating the present value of total depreciation allowances, it is assumed that the discount rate is 4.3%.

The purchase price less the present value of the tax savings from the depreciation allowances.

The results imply that a business owner would realize a higher after-tax return on investment—

and perhaps a greater cash flow in the short run—by purchasing the SUV instead of the passenger

car. Such an inference is warranted because of the differences in the present value of total

allowable depreciation deductions and the present value of the associated tax savings among the

three cases. In general, the greater the present value of these deductions, the greater the tax

savings from purchasing a depreciable asset; and the greater the tax savings, the lower the tax

burden on the returns to investment in the asset. These savings lower the effective price of a

depreciable asset.30 The present value (in 2005 dollars) of total depreciation allowances for the

See Harvey S. Rosen, Public Finance, 7th ed. (New York: McGraw-Hill Irwin, 2005), p. 432.

Congressional Research Service

Tax Preferences for Sport Utility Vehicles (SUVs)

SUV under JGTRRA ($40,000) is 45% greater than the present value of depreciation allowances

for the passenger car; and the present value for the SUV under current law is 35% greater than

that for the passenger car. Although the buyer eventually recovers the acquisition cost of each

vehicle, the passenger car yields the lowest tax savings (in current dollars) because it takes 20

years more than the SUV under JGTRRA and 15 years longer than the SUV under current law to

recover that cost.

Some may find it surprising that there is only a 7% difference between the present value of total

depreciation allowances for the SUV under current tax law and the present value of depreciation

allowances under JGTRRA. After all, AJCA reduced the maximum expensing allowance for

heavy-duty SUVs from over $100,000 to $25,000. If anything, this result suggests that the

decrease in the maximum expensing allowance for heavy-duty SUVs under AJCA did little to

curtail the tax preference for buying these vehicles under current depreciation rules.

Is there any evidence that the tax preference for heavy-duty SUVs under current depreciation

rules has boosted their domestic sales? What evidence is available from public sources seems

inconclusive. On the one hand, domestic sales of full-size and luxury SUVs exhibited surprising

strength in December 2003 and January 2004, and some analysts ascribed this strong showing, in

part, to the availability of the $100,000 expensing allowance, heightened efforts by dealers to

make customers aware of it through local advertising campaigns, and the widespread belief that

Congress would act soon to eliminate or curtail this tax preference. 31 On the other hand, U.S.

sales of the heaviest SUVs declined by 6% in 2004 compared to 2003, even though for more than

10 months of the year the maximum expensing allowance for the vehicles was $102,000.32

The decision to purchase a motor vehicle mainly for business use obviously hinges on more

factors than the tax treatment of its depreciation. Of particular importance in the case of small

business owners are the income and tastes of the buyer; the current price of gasoline and expected

trends in this price in coming years; and the cost, gas mileage, safety features, and repair record

of the vehicles being considered. Assessing the effect of a change in depreciation rules on

domestic sales of a motor vehicle when some or all of the other important factors affecting sales

trends are changing at the same time is a difficult challenge. Nonetheless, it seems reasonable to

assume that domestic demand for heavy-duty SUVs is greater than it would be if the tax code

were to treat the depreciation of these vehicles and passenger cars in the same manner. What is

uncertain is how much greater.

Public policy in a variety of areas—especially energy use, taxation, environmental protection,

highway safety, and oil import dependence—could benefit from a study that evaluates the extent

to which the tax preference for large SUVs embedded in the depreciation rules boosts domestic

demand for them, and the social costs and benefits of the added sales attributable to the

preference.

See Jim Hopkins, “SUV Sales Climb on Tax Loophole; Small Businesses Discover Benefit,” USA Today, February

11, 2004, p. B3.

Brett Clanton, “Large SUVs Lose Luster, Cost Big 3,” Detroit News, January 16, 2005, available at

http://www.detnews.com.

Congressional Research Service

Tax Preferences for Sport Utility Vehicles (SUVs)

Gas Guzzler Excise Tax

The tax treatment of depreciation for heavy-duty SUVs is not the only way in which the federal

tax code encourages the purchase of these vehicles. IRC section 4064, which levies an excise tax

on domestic sales of new automobiles that do not meet statutory fuel economy standards, may

offer small business owners (and other consumers) another incentive to prefer heavy-duty SUVs

to motor vehicles that are more efficient in fuel consumption. This tax is known as the gas guzzler

tax.

The gas guzzler tax originated with the Energy Tax Act of 1978 (P.L. 95-618), and the IRS issued

the first regulations to implement it in 1980. It applies to domestic sales of automobiles by

manufacturers and importers, who are required to pay the tax. IRC section 4064(b) defines an

automobile as any “four-wheeled vehicle propelled by fuel which is manufactured primarily for

use on public streets, roads, and highways.” Until the passage of the Safe, Accountable, Flexible,

Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU, P.L. 109-59) in August

2005, the definition of automobiles also stipulated that such vehicles have an unloaded gross

vehicle weight of 6,000 pounds or less; the act repealed this weight limitation, subjecting all

vehicles meeting the remaining criteria for an automobile to the tax, irrespective of their weight.

Certain vehicles are exempt from the tax: namely, emergency vehicles such as ambulances and

police cars, cars with a gas mileage rating of 22.5 miles per gallon (mpg) and over, and all light

trucks (including SUVs of all weights). Whether a gas guzzler tax is owed—and if so, the amount

of the tax—depends on an automobile’s combined city and highway fuel economy rating, which

is defined as the average number of miles traveled by an automobile per gallon of gasoline as

determined by the Environmental Protection Agency. The current tax ranges from $1,000 for cars

with a fuel economy rating of at least 21.5 miles per gallon but less than 22.5 miles per gallon to

$7,700 for cars with a rating of less than 12.5 miles per gallon. These amounts have been in effect

since the enactment of the Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508). In

FY2004, the tax raised $141 million in revenue, up from $71 million in FY2000.

The tax arguably serves two intertwined policy goals. It promotes the development, manufacture,

and sale of fuel-efficient cars by raising the average cost of producing cars subject to the tax

relative to that of cars exempt from the tax. At the same time, the tax mitigates the negative

external effects of driving relatively fuel-inefficient cars. Prominent among these effects is the

added air pollution from driving such vehicles. To the extent that the burden of the gas guzzler tax

is borne by manufacturers and importers, it compels them to pay for some of these costs.

The Gas Guzzler Tax and the Demand for HeavyDuty SUVs

As noted above, the gas guzzler tax does not apply to SUVs. As a result, demand for heavy-duty

SUVs is likely to be greater than it would be if they were subject to the tax and buyers were

forced to bear its burden. Since most heavy-duty SUVs get relatively low gas mileage, retail

prices could be as much as $4,500 to $7,700 higher for many models if current law were changed

to subject them to the tax and importers, manufacturers, and dealers were to pass the full amount

of the tax on to buyers.

Congressional Research Service

Tax Preferences for Sport Utility Vehicles (SUVs)

It appears that considerable revenue could be raised by modifying the tax so that it applies to all

light trucks (including SUVs). According to one estimate, the U.S. Treasury lost about $10 billion

in revenue in 1999 because of the exemption of light trucks from the tax.33 Domestic sales of

these vehicles totaled 9.4 million units in 2004, or 1.2 million units more than the total for 1999.

Unfortunately, the data needed to estimate the additional revenue that would have been raised if

the tax had applied to all light vehicles sold in the United States in 2004 are not available from

public sources and would be costly to obtain from private sources.

How would domestic demand for heavy-duty SUVs be likely to respond to the imposition of the

gas guzzler tax? The answer hinges on the extent to which buyers end up bearing the burden of

the tax and the sensitivity of demand for those vehicles to increases in retail prices. Although

manufacturers and importers would be required to pay the tax, there is no certainty that they

would bear the entire burden by accepting declines in the profits they earn from domestic SUV

sales. Rather, they would be likely to try to shift at least part of the tax to some combination of

employees (through lower compensation), suppliers of materials, parts, and components (through

lower prices), and buyers of heavy-duty SUVs (through higher retail prices). The distribution of

the burden between manufacturers and importers on the one hand and buyers on the other hand

ultimately hinges on the price sensitivity (or elasticity) of demand and supply for heavy-duty

SUVs. To maintain their profit margins on sales of heavy-duty SUVs, manufacturers would want

to pass the entire amount of the tax on to buyers, but their resolve to do so would be constrained

by the prospect of losing large numbers of buyers in response to an increase in prices because of

the tax. In general, producers are more likely to bear most of the burden of a tax like the gas

guzzler excise tax if demand is more sensitive to price changes than supply in the short run; but

consumers are more likely to bear most of the burden if demand is less sensitive to price changes

than supply in the short run. The data needed to estimate these sensitivities for heavy-duty SUVs

are not available from public sources and would be costly to obtain from private sources.

Legislative Initiatives in the 109th Congress to

Curtail or Eliminate SUV Tax Preferences

Several bills to curtail—directly and indirectly—current tax preferences for heavy-duty SUVs

have been introduced in the 109th Congress. It is uncertain whether any of them will receive

attention from the full House or Senate in coming months. Efforts to curtail the preferences might

encounter opposition from the automobile industry and its allies in Congress. In light of the

current federal budget deficit and the prospect of larger deficits in the future, a key issue in

congressional consideration of any of these measures will be its likely revenue effects.

Four such bills would erase the tax preference for heavy-duty SUVs in current depreciation rules

by subjecting all SUVs with a gross weight of over 6,000 pounds to 14,000 pounds to the annual

depreciation limits for passenger cars under IRC section 280F. The bills are H.R. 4384

(introduced by Representative Christopher Shays on November 17, 2005), H.R. 4409 (introduced

A 2000 study issued by the environmental advocacy group Friends of the Earth concluded that domestic and foreign

automobile manufacturers avoided paying $10.2 billion in gas guzzler excise taxes in 1999 and $43.1 billion from 1995

through 1999 because of the exemption of light trucks from the tax. It is not clear from the study what assumptions

were made in arriving at this estimate. See Friends of the Earth, Gas-Guzzler Loophole: SUVs and Light Trucks Drive

Off with Billions (Washington: 2000), available at http://www.foe.org.

Congressional Research Service

Tax Preferences for Sport Utility Vehicles (SUVs)

by Representative Jack Kingston on November 18, 2005), S. 1852 (introduced by Senator Ken

Salazar on October 6, 2005), and S. 2025 (introduced by Senator Evan Bayh on November 16,

2005). There are some notable differences among the proposals. H.R. 4384 includes a definition

of SUV that would exclude many vans, minivans, and pickup trucks from the depreciation limits.

By contrast, H.R. 4409, S. 1852, and S. 2025 appear to contain no such exclusion, but they would

exempt “vehicles used in a farming business” from the depreciation limits. In addition, they

would increase the limits and expand them to cover vehicles weighing between 6,000 and 14,000

pounds.

An indirect approach to lessening the tax advantages of purchasing heavy-duty SUVs for business

use is offered in S. 2345 (introduced by Senator Charles Grassley on March 1, 2006). The bill

would not change any of the tax preferences for these vehicles, but it would exempt so-called

alternative-energy vehicles from the depreciation limits under IRC section 280F. As a result,

small business owners could depreciate such vehicles faster than they can depreciate a heavy-duty

SUV under current tax law. Alternative-energy vehicles include electric-powered cars, hybrid cars

that run on a combination of gas and electricity, and vehicles powered by an alternative fuel such

as compressed natural gas.34

Yet another indirect approach is taken by H.R. 2070 (introduced by Representative Dennis

Kucinich on May 4, 2005). Like S. 2345, it would not lower any current tax incentive for

acquiring a heavy-duty SUV for business use. Rather, it would create a new tax incentive to buy a

fuel-efficient SUV assembled in the United States, an incentive that any individual taxpayer could

benefit from. The incentive is a non-refundable personal tax credit of $4,500 for those who

purchase a qualified SUV with a rated gas mileage of 45 to 54 mpg; the credit would rise to

$6,000 in the case of a qualified SUV with a rated gas mileage of 55 mpg or over.

There are no bills in the 109th Congress to alter the gas guzzler tax so that it would apply to

SUVs.

Author Contact Information

(name redacted)

Analyst in Public Finance

/redacted/@crs.loc.gov, 7-....

Kurt Ritterpusch, “Finance Bill Would Increase Tax Incentives for Businesses Buying Efficient Vehicles,” Daily

Report for Executives, Bureau of National Affairs, March 2, 2006, p. G-17.

Congressional Research Service

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