Tax Incentives for Alternative Fuel and Advanced Technology Vehicles

Congressional research reportDec 19, 2005

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Prepared for Members and Committees of Congress

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Alternative fuel and advanced technology vehicles face significant market barriers, such as high

purchase price and limited availability of refueling infrastructure. The Energy Policy Act of 2005

(P.L. 109-58) expands and establishes tax incentives that encourage the purchase of these vehicles

and the development of infrastructure needed to support them. Among the new provisions are tax

credits for the purchase of hybrid vehicles (replacing an existing tax deduction), tax credits for the

purchase of advanced diesel vehicles (although it is unclear whether any current vehicles will

qualify), and tax credits to expand refueling infrastructure. This report discusses current federal

tax incentives for alternative fuel and advanced technology vehicles. It also outlines how the

Energy Policy Act of 2005 changes those incentives. This report will be updated as events

warrant.

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Introduction ..................................................................................................................................... 1

Current Tax Incentives (Through 2005) .......................................................................................... 1

Electric Vehicle Tax Credit........................................................................................................ 1

Clean Fuel Vehicle Tax Deduction............................................................................................ 1

Fueling Infrastructure Tax Deduction ....................................................................................... 2

New Tax Credits Under P.L. 109-58 (2006 and Beyond)................................................................ 2

Hybrid Electric Vehicle Tax Credit ........................................................................................... 3

Lean-Burn Vehicle Credit.......................................................................................................... 3

Fuel-Cell Vehicle Purchase Tax Credit...................................................................................... 3

Alternative Fuel Vehicle Tax Credit .......................................................................................... 4

Alternative Fuel Refueling Infrastructure Credit ...................................................................... 5

Table 1. Hybrid Vehicle Tax Credit, by Gross Vehicle Weight........................................................ 3

Table 2. Fuel-Cell Vehicle Tax Credit, by Gross Vehicle Weight.................................................... 4

Table 3. Maximum Alternative Fuel Vehicle Tax Credit, by Gross Vehicle Weight....................... 4

Table 4. Summary of Alternative Fuel and Advanced Technology Vehicle Tax Incentives

Under the Energy Policy Act of 2005........................................................................................... 5

Author Contact Information ............................................................................................................ 5

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Alternative fuel and advanced technology vehicles face significant barriers to wider acceptance as

passenger and work vehicles. Alternative fuel vehicles include vehicles powered by nonpetroleum

fuels such as natural gas, electricity, or alcohol fuels. Advanced technology vehicles include

hybrid vehicles, which combine a gasoline engine with an electric motor system to boost

efficiency.2 Often, these vehicles are more expensive than their conventional counterparts.3

Further, fueling the vehicles is often inconvenient because the number of refueling stations for

alternative vehicles is negligible compared with the number of gasoline stations nationwide; in

some regions, the infrastructure is nonexistent. However, many of these vehicles perform more

efficiently and are better for the environment than conventional vehicles. There has been

significant interest in promoting these vehicles as a response to environmental and energy

security concerns.

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The Energy Policy Act of 1992 (P.L. 102-486, §1913) established individual and business tax

incentives for the purchase of alternative fuel and advanced technology vehicles and for the

installation of alternative fuel infrastructure. The Energy Policy Act of 2005 (P.L. 109-58)

expands these existing tax incentives and creates new ones. Incentives existing prior to P.L. 10958 include

•

the Electric Vehicle Tax Credit;

•

the Clean Fuel Vehicle Tax Deduction; and

•

tax deduction for the installation of alternative fuel infrastructure.

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For 2005, a federal tax credit is available worth 10% of the purchase price of an electric vehicle,

up to a maximum of $4,000 (26 U.S.C. 30). The credit, which was not extended by the Energy

Policy Act of 2005, will be reduced to a maximum of $1,000 in 2006 and will be phased out

completely after 2006.

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For the purchase of alternative fuel vehicles, as well as hybrid electric vehicles, a Clean Fuel

Vehicle Tax Deduction (26 U.S.C. 179A) is available. The amount of the deduction is based on

This report supersedes CRS Report RS21277, Alternative Fuel Vehicle Tax Incentives and the CLEAR ACT.

For more information on these vehicles, see CRS Report RL30758, Alternative Transportation Fuels and Vehicles:

Energy, Environment, and Development Issues, by (name redacted).

Some opponents of tax incentives argue that market barriers alone do not justify government intervention. Proponents

argue that there may be noneconomic reasons (e.g. energy security, clean air) to promote one technology over another.

For more information on the current tax incentives, see the Internal Revenue Service website at http://www.irs.gov.

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the weight of the vehicle. Vehicles under 10,000 pounds gross vehicle weight (i.e., cars and light

trucks) qualify for a $2,000 deduction in 2005; those between 10,000 and 26,000 pounds qualify

for a $5,000 deduction. Vehicles above 26,000 pounds qualify for a $50,000 deduction. The

Energy Policy Act of 2005 terminates this deduction after December 31, 2005, and replaces it

with a tax credit (see below).

Prior to 2002, hybrid electric vehicles were not considered “clean-fuel vehicles” because the

primary fuel for the vehicles is gasoline. However, in May 2002, the Internal Revenue Service

(IRS) announced that taxpayers can claim the deduction for qualified hybrids.5 As of December

2005, eight hybrid models are eligible for the deduction.

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Businesses that install alternative fuel refueling infrastructure can claim a tax deduction of up to

$100,000 (26 U.S.C. 179A). The Energy Policy Act of 2005 eliminates this deduction at the end

of 2005 and replaces it with a tax credit (see below).

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The Energy Policy Act of 2005 expanded and extended the existing tax incentives for

nonconventional vehicles. These new incentives are similar to those proposed in the Clean

Efficient Automobiles Resulting from Advanced Car Technologies Act (CLEAR ACT, S. 971)

and the Volume Enhancing Hardware Incentives for Consumer Lowered Expenses Technology

Act (VEHICLE Technology Act, H.R. 626), as well as legislation discussed in the 108th Congress.

Among other provisions, Sections 1341 and 1342 of the Energy Policy Act of 2005 contain

several tax incentives for alternative fuel and advanced technology vehicles. For example, the act

•

replaces the existing clean-fuel vehicle tax deduction with a new tax credit for

hybrid vehicles;

•

creates a tax credit for the purchase of lean-burn passenger vehicles;6

•

creates a new tax credit for the purchase of fuel-cell vehicles;

•

replaces the existing clean-fuel vehicle tax deduction with an alternative fuel

vehicle tax credit; and

•

replaces the existing deduction for the installation of refueling infrastructure with

a tax credit.

Each of these credits is discussed below; Table 4 summarizes each one.

Further, taxpayers who purchased hybrids in previous years may file an amended return to claim the deduction.

Currently, these are exclusively diesel vehicles. Although lean-burn gasoline engines are technically feasible, no

vehicles with lean-burn gasoline engines (as defined by §1341 of the act) are currently available.

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Under the Energy Policy Act of 2005, the existing clean-fuel vehicle deduction for hybrid electric

vehicles is replaced with a tax credit after 2005. The amount of the credit is based on several

factors. For passenger vehicles, these factors are the fuel economy increase and the expected

lifetime fuel savings when compared with a conventional vehicle of comparable weight. To

qualify for the credit, a hybrid vehicle must meet certain emissions standards and technical

specifications. For heavy-duty vehicles (more than 8,500 pounds), the credit is based on the fuel

economy relative to a comparable vehicle, as well as the incremental cost of the hybrid vehicle

above the cost of the conventional vehicle. The range of potential credits for each vehicle weight

are shown in Table 1. The hybrid vehicle credit is scheduled to expire at the end of 2009.

Table 1. Hybrid Vehicle Tax Credit, by Gross Vehicle Weight

Up to 8,500 pounds

8,501 to 14,000 pounds

14,001 to 26,000 pounds

$400 to $3,400a

$0 to $3,750b

$0 to $7,500b

More than

26,000 pounds

$0 to $15,000b

Source: P.L. 109-58, §1341.

Depending on fuel economy and fuel savings.

b. Depending on fuel economy and incremental cost.

The American Council for an Energy-Efficient Economy estimates that 2006 tax credits for

hybrid passenger vehicles will range from $0 (Honda Insight) to $3,150 (Toyota Prius).7

However, the IRS has not yet announced the value of the credits for 2006.

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The Energy Policy Act of 2005 established a tax credit for the purchase of passenger vehicles

with “lean-burn” engines. For the most part, diesel-powered vehicles that meet certain emissions

and fuel economy standards would qualify for the tax credit, which is structured like the hybrid

tax credit and ranges from $400 to $3,400, based on fuel economy and fuel savings. The credit is

scheduled to expire at the end of 2010.

However, no lean-burn passenger vehicles are available that meet the emission standard.

Consequently, no vehicles on the market qualify for the credit, although many observers expect

automakers to look for ways to reduce the emissions of such vehicles in future years so that the

vehicles can qualify.

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The Energy Policy Act of 2005 provides a tax credit for the purchase of fuel-cell vehicles. The

credit increases with gross vehicle weight, as shown in Table 1. Passenger vehicles that achieve

at least 50% better fuel economy than a comparable conventional vehicle also qualify for an

American Council for an Energy-Efficient Economy, Light-Duty Hybrid and Diesel Vehicle Tax Credits in the Energy

Bill. August 2005. http://www.aceee.org/transportation/hybtaxcred.htm Accessed December 15, 2005.

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additional tax credit of between $1,000 and $4,000, depending on overall fuel economy. The

credit expires at the end of calendar year 2014. However, because of technical and cost concerns,

no fuel-cell vehicles are commercially available, and the development of a mass-market fuel-cell

vehicle in the near future seems unlikely.

Table 2. Fuel-Cell Vehicle Tax Credit, by Gross Vehicle Weight

Up to 8,500 pounds

$8,000 ($4,000 after 2009), plus up to $4,000,

depending on fuel economy

Source:

8,501 to 14,000

14,001 to 26,000

More than 26,000

pounds

$10,000

$20,000

$40,000

P.L. 109-58, §1341.

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The Energy Policy Act of 2005 replaces the existing clean-fuel vehicle tax deduction with a credit

for the purchase of a new alternative fuel vehicle (AFV). The new credit is equal to a percentage

of the incremental cost of the AFV, subject to certain maximum dollar amounts. The incremental

cost is the difference between the higher cost of the AFV and its conventional counterpart. Under

the act, the applicable percentage is 50% of the incremental cost plus an additional 30% if the

vehicle meets certain emissions requirements. The maximum credit is based on the weight of the

vehicle, as shown in Table 3. The credit expires at the end of 2010.

. Maximum Alternative Fuel Vehicle Tax Credit,

by Gross Vehicle Weight

Table 3

Up to 8,500 pounds

8,501 to 14,000 pounds

14,001 to 26,000 pounds

up to $4,000a

up to $8,000b

up to $20,000c

More than

26,000 pounds

up to $32,000d

P.L. 109-58, §1341.

Notes: The maximum tax credit is based on applicable percentage of incremental cost. The maximum

percentage of incremental cost is 80%.

a. Maximum incremental cost is $5,000.

b. Maximum incremental cost is $10,000.

c. Maximum incremental cost is $25,000.

d. Maximum incremental cost is $40,000.

Source:

To qualify for the credit, the vehicle is required to be a “dedicated” AFV, meaning that it must not

be capable of operating on conventional fuel. This provision is a response to criticisms of

previous AFV policies that included “dual-fuel” vehicles.8 In many cases, dual-fuel vehicles

operate solely on gasoline. Because some alternative fuels must be blended with a small amount

of gasoline (e.g., ethanol, methanol), vehicles using these fuels qualify for a prorated tax credit.

Dual-fuel vehicles can operate using either an alternative fuel or a conventional fuel (e.g., gasoline).

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The Energy Policy Act of 2005 replaces the existing deduction for the installation of alternative

fuel infrastructure with a tax credit. The credit is equal to 30% of the purchase or installation cost

of the refueling property, subject to a maximum dollar amount. For retail property, the maximum

credit is $30,000. For residential property, the maximum is $1,000. The credit expires after 2014

for hydrogen infrastructure; the credit for all other fuels expires after 2009.

Table 4. Summary of Alternative Fuel and Advanced Technology Vehicle Tax

Incentives Under the Energy Policy Act of 2005

Tax Incentive

Type

Maximum

Passenger Vehicle

Credit

Maximum

Maximum HeavyDuty Vehicle Credit Infrastructure

Credit

Expiration

Date

Hybrid vehicle

Lean-burn vehicle

Fuel-cell vehicle

Alternative fuel

vehicle

$3,400

$12,000

$15,000

n/a

$40,000

Dec. 31, 2009

Dec. 31, 2010

Dec. 31, 2014

$4,000

$32,000

n/a

Residential refueling

infrastructure

Retail refueling

infrastructure

n/a

$1,000

$30,000

Dec. 31, 2010

Dec. 31, 2009a

Source: P.L. 109-58, §§1341-1342.

Dec. 31, 2014, for hydrogen infrastructure.

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(name redacted)

Specialist in Energy and Environmental Policy

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

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