Hybrid Hoax
Carmakers and consumers cheered last August when the U.S. Congress passed a tax credit--available beginning in 2006--for hybrid vehicles. But would-be hybrid buyers are still waiting to find out exactly how much the credit will be for different models. And many buyers could end up losing the promised credit to the dreaded alternative minimum tax--unless Congress fixes the current tax law.
"We're glad that there are incentives; it sends a good signal that the government supports hybrid cars," says Michael Love, national manager of regulatory affairs for Toyota Motor (nyse: TM - news - people ) in Torrance, Calif. "But it's unfortunate that the whole system is so complex that each person needs to consult their tax accountant, or roll the dice and see what happens."
Why is the size of the credit still up in the air? The credit is calibrated to how many more miles a gallon a hybrid gets than a non-hybrid car of a similar weight. This means, perversely, that some small hybrids--like Honda Motor's (nyse: HMC - news - people ) Insight with a manual transmission, which gets 60 miles per gallon (city)--probably won't qualify at all. But a big hybrid SUV, like the Mariner from Ford Motor's (nyse: F - news - people ) Mercury division, which gets just 33 miles per gallon (city), could get a big credit (estimated at $1,950) based on its MPG edge over its gas-guzzling brethren.
On Jan. 13, Treasury Secretary John Snow announced the procedures for carmakers to submit data along with their calculation of the credit they think their cars deserve. The carmakers submitted their data right away--Toyota's was in on Jan. 20. The Treasury had promised to respond with an approval (or adjustment) within 30 days, but now says it is still working on the submissions.
In the meantime, the American Council for an Energy-Efficient Economy and the Union of Concerned Scientists' Hybrid Center have put out tax credit estimates, for example, $3,150 for a Toyota Prius. Note: these are estimates; both outfits estimate the credit for the four-wheel version of Toyota's hybrid Highlander at $2,200; but for the front-wheel version, the ACEEE puts the credit at $2,600 and the UCS puts it at just $1,950. Not pocket change, when you're talking about a credit, which normally reduces your tax bill dollar for dollar. (A credit is better than a deduction, which simply reduces your taxable income. So if you pay taxes at a 25% rate, a $2,000 credit is equal to an $8,000 deduction.)
Which brings us to the next problem: Once Treasury has settled on the dollar amount of the credits, this will represent the most a taxpayer will be able to get; some hybrid buyers will receive little if any benefit. That's because when Congress passed the credit, it allowed the credit to reduce regular tax bills, but not the AMT--that second shadow tax that more and more people pay. So the 5 million or so taxpayers, mostly upper-middle-income folks in high-tax states, who are sure to owe alternative minimum tax in 2006, will not be able to claim the hybrid break at all.
Wait, it gets worse. You figure your regular tax, then your AMT and pay whichever is higher. Say your regular tax is $500 higher than your AMT. That means even if you don't otherwise owe AMT, you can use only $500 of what might have been a $2,500 hybrid credit. And here's the real kicker: Congress has yet to extend certain temporary AMT relief that expired at the end of 2005. If it doesn't extend that relief, then 26 million taxpayers--including almost everyone who can afford a new car--will pay AMT and there will be almost no one left who can actually benefit from a hybrid break. (The exception: Folks earning really big bucks--say $1 million or more--don't usually pay AMT. So a Hollywood star who already owns a Porsche and a Hummer, can get a credit for adding a Prius to his status stable.)
This craziness doesn't just hurt upper-middle class families. Here's how one middle-class family could lose the credit, according to Phil Schwindt, senior tax research analyst with CCH, a Wolters Kluwer (other-otc: WTKWY.PK - news - people ) business.
Take a married couple, each earning $30,000, with $6,000 in childcare expenses for two children under 13. They lean green and want to buy a Prius. But under current law, they would lose the entire hybrid car credit, and they would even lose $380 of the $1,200 childcare credit. If Congress, as expected, finally renews AMT relief, they would get the full childcare credit, but keep only $1,000 of the hybrid credit. The only chance they have to get the full hybrid credit is if Congress passes a new fix specifically allowing it. (Such a provision was in a Senate version of a tax cut package, but not in the House counterpart. So it's iffy.)
One last gotcha: While you are waiting to see if Congress fixes the AMT mess, the value of the credit might start dropping. Once a manufacturer delivers 60,000 hybrids to dealers, a one-year phase-down of the credit begins in the next quarter. Toyota could reach that number by June, so the credit for its hybrids would drop to just 50% of its starting value, for people who buy hybrids in the fourth quarter of 2006 and the first quarter of 2007, and to 25% for the next two quarters, and zero after that. This won't affect carmakers like Ford and General Motors (nyse: GM - news - people ), which are producing fewer hybrids, until later.
How much longer is Congress going to leave prospective hybrid buyers idling?
Forbes
"We're glad that there are incentives; it sends a good signal that the government supports hybrid cars," says Michael Love, national manager of regulatory affairs for Toyota Motor (nyse: TM - news - people ) in Torrance, Calif. "But it's unfortunate that the whole system is so complex that each person needs to consult their tax accountant, or roll the dice and see what happens."
Why is the size of the credit still up in the air? The credit is calibrated to how many more miles a gallon a hybrid gets than a non-hybrid car of a similar weight. This means, perversely, that some small hybrids--like Honda Motor's (nyse: HMC - news - people ) Insight with a manual transmission, which gets 60 miles per gallon (city)--probably won't qualify at all. But a big hybrid SUV, like the Mariner from Ford Motor's (nyse: F - news - people ) Mercury division, which gets just 33 miles per gallon (city), could get a big credit (estimated at $1,950) based on its MPG edge over its gas-guzzling brethren.
On Jan. 13, Treasury Secretary John Snow announced the procedures for carmakers to submit data along with their calculation of the credit they think their cars deserve. The carmakers submitted their data right away--Toyota's was in on Jan. 20. The Treasury had promised to respond with an approval (or adjustment) within 30 days, but now says it is still working on the submissions.
In the meantime, the American Council for an Energy-Efficient Economy and the Union of Concerned Scientists' Hybrid Center have put out tax credit estimates, for example, $3,150 for a Toyota Prius. Note: these are estimates; both outfits estimate the credit for the four-wheel version of Toyota's hybrid Highlander at $2,200; but for the front-wheel version, the ACEEE puts the credit at $2,600 and the UCS puts it at just $1,950. Not pocket change, when you're talking about a credit, which normally reduces your tax bill dollar for dollar. (A credit is better than a deduction, which simply reduces your taxable income. So if you pay taxes at a 25% rate, a $2,000 credit is equal to an $8,000 deduction.)
Which brings us to the next problem: Once Treasury has settled on the dollar amount of the credits, this will represent the most a taxpayer will be able to get; some hybrid buyers will receive little if any benefit. That's because when Congress passed the credit, it allowed the credit to reduce regular tax bills, but not the AMT--that second shadow tax that more and more people pay. So the 5 million or so taxpayers, mostly upper-middle-income folks in high-tax states, who are sure to owe alternative minimum tax in 2006, will not be able to claim the hybrid break at all.
Wait, it gets worse. You figure your regular tax, then your AMT and pay whichever is higher. Say your regular tax is $500 higher than your AMT. That means even if you don't otherwise owe AMT, you can use only $500 of what might have been a $2,500 hybrid credit. And here's the real kicker: Congress has yet to extend certain temporary AMT relief that expired at the end of 2005. If it doesn't extend that relief, then 26 million taxpayers--including almost everyone who can afford a new car--will pay AMT and there will be almost no one left who can actually benefit from a hybrid break. (The exception: Folks earning really big bucks--say $1 million or more--don't usually pay AMT. So a Hollywood star who already owns a Porsche and a Hummer, can get a credit for adding a Prius to his status stable.)
This craziness doesn't just hurt upper-middle class families. Here's how one middle-class family could lose the credit, according to Phil Schwindt, senior tax research analyst with CCH, a Wolters Kluwer (other-otc: WTKWY.PK - news - people ) business.
Take a married couple, each earning $30,000, with $6,000 in childcare expenses for two children under 13. They lean green and want to buy a Prius. But under current law, they would lose the entire hybrid car credit, and they would even lose $380 of the $1,200 childcare credit. If Congress, as expected, finally renews AMT relief, they would get the full childcare credit, but keep only $1,000 of the hybrid credit. The only chance they have to get the full hybrid credit is if Congress passes a new fix specifically allowing it. (Such a provision was in a Senate version of a tax cut package, but not in the House counterpart. So it's iffy.)
One last gotcha: While you are waiting to see if Congress fixes the AMT mess, the value of the credit might start dropping. Once a manufacturer delivers 60,000 hybrids to dealers, a one-year phase-down of the credit begins in the next quarter. Toyota could reach that number by June, so the credit for its hybrids would drop to just 50% of its starting value, for people who buy hybrids in the fourth quarter of 2006 and the first quarter of 2007, and to 25% for the next two quarters, and zero after that. This won't affect carmakers like Ford and General Motors (nyse: GM - news - people ), which are producing fewer hybrids, until later.
How much longer is Congress going to leave prospective hybrid buyers idling?
Forbes
posted by Ottawa Gas Prices | 4:34 PM
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