Drivers of hybrid cars are being offered a range of lucrative benefits – from tax breaks to free parking – in return for buying one of the fuel-efficient vehicles.
The most recent additions are in two major bills currently awaiting President Bush’s signature. A bill designed to boost energy production also replaces a federal tax deduction for buying a hybrid with a more generous tax credit that theoretically could total as much at $3,400. A separate highway-construction bill gives states the right to open high-occupancy-vehicle lanes to hybrids even if there’s only one person in the car.
These federal incentives join a raft of others already approved by state and local governments. At least 20 states have already passed incentives to encourage consumers to buy hybrids. In New Mexico, any hybrid that gets at least 27.5 miles per gallon is exempt from state sales tax. New York provides a state income-tax credit worth $2,000. The city of San Jose, Calif., offers free parking in city lots and at meters. More sweeteners are probably on the way: Several state legislatures are currently considering additional incentives.
It’s happening at a time that hybrid cars are growing in popularity among consumers – and auto makers are scrambling to meet demand. So far, just a few auto makers have hybrid vehicles on the road, led by Toyota Motor Corp., which this year expects to sell 100,000 of its popular Prius hybrids. Wednesday, Toyota signaled the rapidly growing importance of the new class of cars by saying it plans to introduce 10 more hybrid vehicles in the next decade, with the expectation that they will eventually account for one in four of its U.S. sales. Honda Motor Co. and Ford Motor Co. also have hybrids on the market, though in smaller numbers.
The soaring popularity of hybrids – which use a combination of electrical and gasoline engines to power the wheels – represents an important shift among auto makers. Amid high fuel prices, sales of profitable gas-guzzling sport utility vehicles have cooled, and manufacturers are starting to respond to consumer demand for more efficient vehicles.
Policy-makers are eager to spur demand for hybrids because they get good mileage, reduce emissions and cut dependence on foreign oil. However, their added complexity means they typically cost a few thousand dollars more than their conventional counterparts – and the savings at the pump aren’t enough to make up for the higher prices.
Supporters of the provision in the highway bill to open HOV lanes to single-occupant hybrid vehicles argue that the lanes currently are underused, and opening them to hybrids will give the technology a big boost. But skeptics worry that the move will clog the HOV lanes, which were designed to encourage carpooling. In northern Virginia, where hybrids have been allowed on HOV lanes since 2000, local officials now are lobbying the state legislature to ban them. “We’ve been flooded by calls from carpoolers saying there are hybrids everywhere,” says Joan Morris, spokeswoman for Virginia Department of Transportation.
For consumers, the tax provision replaces a $2,000 deduction, which was a reduction in taxable income, with a tax credit that instead reduces the tax bill itself. The new tax credit also applies to diesel cars, provided that they are engineered to reduce polluting emissions. President Bush is expected to sign the energy bill into law.
The size of the tax credit depends on a formula that takes into consideration how fuel-efficient the engine is, compared with a comparable car from the 2002 model year. If the car is 25 percent to 50 percent better, the buyer gets a $400 credit. The credit grows to $1,600 for cars that double the fuel efficiency of a comparable 2002 vehicle. The tax credit also takes into consideration how much fuel a vehicle is estimated to save over its lifetime. Taken together, the total benefit can climb to $3,400.
But there’s a twist to the law. In a move that could benefit domestic brands – which currently lag behind their Japanese rivals in the hybrid market – Congress has set a cap of 60,000 on the total number of people who can claim the tax credit from any one auto maker between the years of 2006 and 2009. The result could be that Toyota and possibly Honda – two of the leading sellers of hybrids right now – may run through their tax credits before 2009, just as domestic manufacturers are gearing up sales of their own hybrids.
General Motors Corp. and DaimlerChrysler AG don’t have any hybrids now but hope to have something on the market by the 2008 model year. So, by 2008, shoppers might be able to take a tax credit if they buy a GM hybrid, but not if they buy one from Toyota. “Clearly, this bill is aimed at helping the domestic companies,” says Dan Sperling, director of the Institute of Transportation Studies at the University of California, Davis.
Ford expects to sell 20,000 Escape SUVs and about 4,000 Mercury Mariner hybrids a year, which means the tax credit might last long enough to cover all its hybrid sales in the 2006-2009 window.
A House Republican aide who worked on the issue said lawmakers capped the credit to keep the cost to about $800 million over five years, but added that they also hoped to help newcomers – the domestic manufacturers – break into the hybrid market.
Ford’s chief lobbyist, Dan Brouillette, adds that Congress was interested in helping newcomers. “Congress intended to provide some competition in the marketplace,” he says.
Toyota says it is pleased that the hybrid tax break is there at all. “We understand the politics of the situation and we understand Congress has a limited budget to work with,” says spokeswoman Martha Voss. “We do think our customers will see a significant benefit.”
The provision in the highway bill gives special consideration to Ford, which recently introduced the Escape SUV hybrid. As originally drafted, the bill required hybrids to get 45 mpg in order to use HOV lanes. Under that rule, the Escape wouldn’t have qualified. Sen. Jim Talent, a Missouri Republican who has an Escape plant in his state, successfully lobbied for a change to require hybrids using HOV lanes to get at least 50 percent better mileage than their conventional counterparts.
It’s unclear how significant an impact the various incentives – such as state sales-tax breaks and HOV privileges – are having on people in the market for a new car. Daniel Polakoff, a retired health-care manager from outside Sacramento, Calif., bought a Toyota Prius last year simply because it gets good mileage, roughly 60 mpg in city driving. But it wasn’t until after he bought it that he realized he was entitled to a $2,000 federal tax deduction. “It was found money,” he said.