Federal Incentives Help Fuel a Run on Hybrids

Forget dealer incentives for a moment. A motorist who is thinking about buying a hybrid vehicle this summer can factor a tax credit of as much as $3,400 into the purchase decision.

The bottom line: Costly hybrids are beginning to look like a steal.

“In the past, you would have sold the car before you’d break even on the gas savings,” said Paul Taylor, chief economist at the National Automobile Dealers Assn. in McLean, Va.

But international events have pushed the price of crude oil -- and gasoline -- ever higher. The new tax credits, Taylor said, help to “really change the economics.”

Hybrid cars typically cost about $2,500 more than comparable, conventionally powered vehicles, Taylor noted.

But with the price of a gallon of gasoline reaching a national average of $3, the fuel savings on a car that gets 40 miles to the gallon versus 20 mpg would be about $1,125 a year for someone who drives 15,000 miles annually.

In addition, last year’s federal Energy Policy Act provided tax credits for buyers of certain “energy efficient” vehicles.

Though the credits are claimed at tax time, not when purchasing a car at the dealership, buyers are responding in droves.

“These cars come in the door and immediately go out,” said Fritz Hitchcock, president of Puente Hills Toyota and director of the California Motor Car Dealers Assn. “The tax incentives are a huge part of it.”

Hybrid sales jumped 26% in the first six months of 2006 compared with a year earlier, with 116,994 hybrid cars and light trucks sold through June. That double-digit sales gain was especially impressive because 2005 was a record year. There’s been a fourfold increase in hybrid sales since 2001, when hybrid vehicles became widely available, according to the national dealers association.

The brisk pace of hybrid sales could limit how long the tax breaks are available. The energy law that authorized the breaks includes a trigger that says that once a particular hybrid model has sold more than 60,000 units, the tax break on that model will start to diminish.

Three months after the sale of the 60,000th vehicle, buyers will be able to claim just half of the tax credit that’s currently available on that car. Six months later, the credit amount will drop to one-quarter of today’s level, and then it disappears completely.

Many hybrid models, such as the Honda Insight, don’t sell enough to flirt with the limitation anytime soon, but the ever-popular Toyota Prius is already on the cusp.

So far this year, 48,156 Prius’ have been sold, according to the national dealers association. At today’s sales pace, Prius buyers could lose the full tax credit by this fall.

That’s not something that all dealers understand. Hitchcock, for example, said he’d never heard of the credits’ being phased out based on sales volume.

That isn’t the only complication for buyers. For example, each type of hybrid qualifies for a different level of tax break.

Because the breaks are so substantial, it makes sense to understand them before shopping.

Here’s how they work:

Each hybrid vehicle actually qualifies for two different tax credits. The first credit is based on how many more miles the hybrid gets per gallon than a similar standard-fuel vehicle.

It’s not always easy to calculate. When a manufacturer produces a model with hybrid- and gasoline-engine variants, the assessment is fairly easy. When there’s no identical model, government officials work with the manufacturer to make a judgment call.

Hybrids that are 25% more fuel-efficient than a standard car qualify for a $400 “fuel economy” credit. Those that are more than 50% more fuel-efficient qualify for an $800 credit, while those that are 250% more fuel-efficient get the maximum $2,400 credit. Cars that are less than 25% more fuel-efficient than standard gasoline-driven engines don’t get this credit at all.

The second tax break is a “conservation” credit, which is intended to subsidize upfront a car’s lifetime fuel efficiency. This credit ranges from $250 to $1,000 a car.

The two credits are added together to get the full tax break available on any given car.

These credits, which took effect Jan. 1, replaced a $2,000 tax deduction that was available for hybrid car purchasers. The deduction was simpler, but the credits are far more valuable.

That’s because deductions simply reduce the amount of income that’s subject to tax, while credits reduce the tax owed on a dollar-for-dollar basis. For example, a $2,000 deduction saves a person in the 30% federal tax bracket $600 in taxes, but a $2,000 credit saves $2,000.

The Internal Revenue Service and the Environmental Protection Agency determine the credit amounts for the hybrid vehicles on the market.

So far, 27 different cars have been “certified,” but that number counts some vehicles more than once because of different versions and model years. As new cars are presented for fuel tests, the agencies will continue to certify them, IRS spokesman Anthony Burke said.

Because the tax breaks rely on estimates of energy savings, one car model -- such as the Honda Accord -- can qualify for different breaks if the model has different versions.

For instance, the 2006 Honda Accord Hybrid AT provides a $1,300 credit. But if the car doesn’t have “updated control calibration” equipment -- the Accord’s 2005 models lack it -- the car qualifies for a tax break of only $650.

The front-wheel drive Ford Escape gets a $2,600 tax credit, but the four-wheel drive model of the same car qualifies for just $1,950 in tax credits.

The vehicles qualifying for the smallest tax credit are the GMC Sierra and the Chevrolet Silverado. Both two-wheel-drive hybrid pickup trucks qualify for the minimum $250 conservation credit. But, the four-wheel drive models of the same trucks qualify for $650 in tax credits.

The most lucrative certification so far: the Prius, which qualifies for a $3,150 credit. Toyota’s Highlander and Camry hybrids -- as well as the two-wheel drive Ford Escape -- each qualify for a $2,600 credit.

A full listing of all the cars that qualify for tax credits, and an explanation of the Byzantine rules that govern them, is posted at www.irs.gov. Use the search engine to find a “summary of the credit for qualified hybrid vehicles.”

Kathy M. Kristof, author of “Investing 101” and “Taming the Tuition Tiger,” welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof @latimes.com. For previous columns, visit latimes.com/kristof.

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A hybrid tax break

Here are the federal tax credits approved to date for the purchase of a hybrid vehicle and the cars that qualify.

Make and model (year):

Chevrolet Silverado 2-wheel drive pickup (2006, 2007)

GMC Sierra, 2-wheel drive pickup (2006, 2007)

Tax credit: $250

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Make and model (year):

Honda Accord Hybrid AT and Navil AT (2005)

Saturn Vue Green Line (2007)

Chevrolet Silverado, 4-wheel drive pickup (2006, 2007)

GMC Sierra, 4-wheel drive pickup (2006, 2007)

Tax credit: $650

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Make and model (year): Honda Accord AT and Navi AT, (2006)

Tax credit: $1,300

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Make and model (year): Honda Insight CVT (2005, 2006)

Tax credit:

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Make and model (year): Lexus GS450h (2007)$1,550

Tax credit: $1,450

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Make and model (year): Honda Civic CVT and MT (2005)

Tax credit: $1,700

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Make and model (year):

Ford Escape 2-wheel drive (2006, 2007)

Mercury Mariner, 4-wheel drive (2006, 2007)

Tax credit: $1,950

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Make and model (year): Honda Civic CVT (2006)

Tax credit: $2,100

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Make and model (year): Lexus, RX400h (2006)

Tax credit: $2,200

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Make and model (year):

Ford Escape 2-wheel drive (2006, 2007)

Toyota Highlander hybrid, 2006

Toyota Camry hybrid (2007)

Tax credit: $2,600

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Make and model (year): Toyota Prius (2005, 2006)

Tax credit: $3,150

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Source: Internal Revenue Service

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