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Tax incentives drying up for popular hybrid cars
The federal government offers tax incentives that can save consumers thousands of dollars when they purchase gas-sipping hybrid vehicles. But buyer beware: The three most popular hybrids sold in America either no longer qualify for the tax break or are about to see it reduced sharply.
On Tuesday, the tax credit on the No. 3-selling Honda Civic hybrid will be cut in half, from $1,050 to $525. It will disappear altogether at the end of the year. The credit on the top-selling Toyota Prius, once $3,150, and the No. 2 Toyota Camry hybrid, vanished last fall.
The Prius and Civic rank first and second in fuel economy among cars for sale in the U.S., according to the government, with combined city-highway ratings of 46 and 42 miles per gallon, respectively. The Camry hybrid has combined fuel economy of 34 mpg.
"We need to be reducing our dependence on oil, so why are we taking away something that will encourage people to do that?" asked Ailis Aaron Wolf, spokeswoman for the advocacy group 40mpg.org, which wants to raise mileage standards.
According to the 2005 federal law that established the hybrid credit, the tax break begins to phase out after a manufacturer sells 60,000 qualifying vehicles. Mainly because of heavy demand for the Prius, Toyota reached that benchmark early in the program, and tax breaks for its Toyota and Lexus brand hybrids were gone by last October.
Honda hit the limit last year, and the original $2,100 tax credit on the Civic hybrid began phasing out Jan. 1.
Unlike a deduction, which lowers the amount of a person's income subject to taxation, a credit reduces the taxes owed on a dollar-for-dollar basis. In other words, a $2,100 tax credit is like getting a delayed $2,100 discount on the price of a new car. (The hybrid tax credit doesn't apply to used cars.)
So far, the diminished tax breaks don't seem to be hurting sales of either the Prius or the Civic, which are in short supply and command hefty markups at many dealerships.
"Maybe one in four of our customers even knows about the tax incentive," said Marc Canon, a spokesman for AutoNation Inc., which owns about 20 Honda dealerships nationwide. "Fuel economy is what's bringing them in."
Gas savings were the spark for Brant Walsh of Silverton, Ore., but he still wanted to buy a Civic hybrid before the tax credit was halved. Unfortunately, none was available in his area until July, and dealers wouldn't let him buy a car until it was actually on the lot.
That meant Walsh couldn't take advantage of a wrinkle in the IRS rules, which ties the amount of the hybrid credit to the date the vehicle is purchased, rather than when it is delivered. But he's not losing any sleep over his decision, especially because, unlike California, Oregon offers a $1,500 state income tax credit to hybrid buyers.
"I feel good about it," the a 26-year-old IT manager said. "I look at the tax credit as a bonus. It was not the main selling point for me."
Still, without tax breaks, it can take longer for fuel savings to make up for the added cost of a hybrid vehicle's complex gasoline-electric powertrain.
For example, a 2008 Camry hybrid sells for about $4,000 more than a regular Camry, according to a new study by data tracker Kelley Blue Book. With gas at $4.50 a gallon and no tax credit, it will take 6.4 years to make up the cost difference, the study found.
A competing sedan, the Nissan Altima hybrid, costs about $4,400 more than its non-hybrid version but is eligible for a $2,350 tax credit. The payback period for the Altima is 3.7 years, according to Kelley. Losing the credit also hurts the economics of buying a Prius, which continues to sell briskly even with dealer premiums of $3,000 or more tacked on.
"Many consumers don't do the math," said Eric Ibara, director of market valuation at Kelley Blue Book. "They just know they're tired of paying $100 every week at the pump, so they get rid of their large SUV and jump into a hybrid."
Nissan hopes the Altima's tax-credit edge over its Honda and Toyota rivals will boost sales. Although the car is getting some traction with consumers, it's not flying out of showrooms at the pace of the Prius and Civic.
Besides the Altima, hybrid vehicles that still qualify for significant federal tax credits include the Chevrolet Malibu and the Ford Escape. In addition, the Honda Civic GX, which is powered by natural gas, qualifies for a $4,000 "alternative fuel" tax break.
Even though Honda says the shrinking Civic hybrid tax credit puts it at a competitive disadvantage, the automaker isn't pushing to kill the tax break, which it says was flawed from the start because it penalizes the companies that pioneered hybrid technology.
"It wasn't the most rational way to establish an incentive program," said Edward Cohen, Honda's vice president of government and industry relations.