Tax Preferences for Sport Utility Vehicles (SUVs): Current Law and Legislative Initiatives in the 109th Congress

CRS Report for Congress
Tax Preferences for Sport Utility Vehicles (SUVs):
Current Law and Legislative Initiatives
th
in the 109 Congress
Updated April 4, 2006
Gary Guenther
Analyst in Business Taxation and Finance
Government and Finance Division


Congressional Research Service ˜ The Library of Congress

Tax Preferences for Sport Utility Vehicles (SUVs):
Current Law and Legislative Initiatives
in the 109th Congress
Summary
The surge in domestic popularity of large sport utility vehicles (SUVs) since the
early 1990s has stirred a debate over what steps the federal government should take,
if any, to mitigate their effects on the environment, highway safety, traffic
congestion, and U.S. dependence on foreign sources of oil. Legislative activity in theth
108 Congress expanded the scope of the debate to include the ways in which the
federal tax code encourages the purchase of heavy-duty SUVs, primarily for business
use. In May 2003, Congress passed a measure (the Jobs and Growth Tax Relief
Reconciliation Act of 2003) that raised the maximum expensing allowance under
section 179 of the Internal Revenue Code (IRC) for these vehicles to $100,000 from
May 2003 through the end of 2005; the American Jobs Creation Act of 2004 lowered
the allowance to $25,000, as of October 22, 2004.
This report examines current federal tax preferences for SUVs and legislation
in the 109th Congress that would alter them. It will be updated to reflect subsequent
legislative activity addressing the preferences.
One way in which the federal tax code can influence the purchase of heavy-duty
SUVs for business use is through the tax treatment of depreciation for these vehicles.
Under current tax law, the depreciation of passenger cars is treated less generously
than that of light trucks (including many SUVs). Passenger cars, which are defined
as motor vehicles weighing 6,000 pounds or less, are considered so-called listed
property — and thus subject to annual limits on depreciation allowances. By
contrast, light trucks, which are defined as motor vehicles weighing more than 6,000
pounds (with some exceptions), are generally depreciated under a different and more
favorable set of rules. For example, SUVs considered light trucks are eligible for a
maximum expensing allowance of $25,000 in the 2005 tax year, but the maximum
first-year depreciation allowance in the same year for a passenger car under IRC
section 280F is $2,960. As a result, a business taxpayer can realize a greater
reduction in the after-tax cost of a vehicle by purchasing a heavy-duty SUV instead
of a passenger car of comparable value.
The federal tax code also encourages the purchase of heavy-duty SUVs by
excluding them from the gas guzzler excise tax. The tax is levied on domestic sales
of new automobiles with relatively poor fuel economy ratings. It is paid by
manufacturers and importers. All light trucks, including all SUVs, are exempt from
the tax.
Several legislative proposals in the 109th Congress would curtail the tax
preference for heavy-duty SUVs embedded in current depreciation rules.
Specifically, four bills — H.R. 4384, H.R. 4409, S. 1852, and S. 2025 — would erase
this preference by subjecting all SUVs with a gross weight of more than 6,000
pounds to 14,000 pounds to the annual depreciation limits for passenger cars under
IRC section 280F. Two other bills — H.R. 2070 and S. 2345 — take an indirect
approach to lessening this tax preference.



Contents
Domestic Demand for SUVs and the Debate Over Their Welfare Effects......3
Depreciation of Motor Vehicles Under the Federal Tax Code...............5
Depreciation of SUVs Under the Federal Tax Code.......................9
Accelerated Depreciation and Demand for Heavy-Duty SUVs..............11
Gas Guzzler Excise Tax............................................14
The Gas Guzzler Tax and the Demand for Heavy-Duty SUVs..............15
Legislative Initiatives in the 109th Congress to Curtail or Eliminate SUV
Tax Preferences..............................................16
List of Tables
Table 1. First-Year Depreciation Deductions and Present Value of
Total Depreciation Deductions and Total Tax Savings for a Large SUV
and a Passenger Car Placed in Service in 2005 .....................12



Tax Preferences for Sport Utility Vehicles:
Current Law and Legislative Initiatives in the
th
109 Congress
Americans have developed a love/hate relationship with sport utility vehicles
(SUVs). Some view them as a symbol of profligate consumption and reckless
disregard for highway safety, environmental protection, and fuel economy. For
others, they represent a triumph of automotive engineering and design, one that is
manifested in their unrivaled combination of ample storage space, enhanced
passenger safety, towing capability, bold styling, and freedom to explore rugged
terrain that is inaccessible for the average passenger car. In the decade ending in
2003, SUVs became a conspicuous presence on American roads, streets, and
highways, as their sales and average size and weight steadily increased.
Although many SUV owners use them as they would a passenger car, there are
some notable differences in design and performance between the typical SUV and the
typical passenger car. Generally, SUVs tend to be taller and boxier. Many are built
on the rigid chassis of a pick-up truck, giving them a relatively high clearance
between the road surface and the undercarriage. Partly because SUVs tend to have
a higher center of gravity than passenger cars, their ride feels bumpier and more like
that of a truck, despite the availability of the same luxury options found in many
automobiles. The increasing popularity of so-called crossover SUVs, which combine
some of the attributes and looks of an SUV with the ride and handling of a passenger
car, raises the possibility that over time the differences between the typical SUV and
the typical passenger car will lessen.1
Concern over the effects of SUVs on air quality, highway safety, and fuel
consumption has spawned a continuing debate over whether the federal government
should subject these vehicles to more stringent regulatory standards for safety andth
fuel economy. Legislative activity by the 108 Congress expanded the scope of
debate to include the ways in which federal tax policy affects the demand for heavy-
duty SUVs.
In passing the Jobs and Growth Tax Relief Reconciliation Act of 2003
(JGTRRA, P.L. 108-27), the 108th Congress hoped to achieve a variety of policy
objectives, including faster growth in domestic business investment and job creation.
Congressional debate over the measure gave no indication, however, that boosting
domestic demand for heavy-duty SUVs was one of these objectives. Yet a provision
in JGTRRA intended to stimulate small business investment in machinery and


1 See Brett Clanton, “Large SUVs Lose Luster; Cost Big 3,” Detroit News, Jan. 16, 2005,
p. 1A; and Christine Tierney, “Party’s Over for Large SUVs as Tastes Shift,” Detroit News,
Dec. 9, 2005, p. 1A.

equipment (including most motor vehicles) and packaged software appeared to have
such an effect. The provision made the expensing allowance under section 179 of
the Internal Revenue Code (IRC) more generous in 2003 through 2005.
Not surprisingly, producers of heavy-duty SUVs and their dealers welcomed the
stimulus. At the time JGTRRA was enacted, both parties were earning sizable profit
margins on domestic sales of such vehicles.2
But not everyone was pleased that the newly enhanced expensing allowance
applied to large SUVs. SUV critics labeled it an “SUV tax loophole” that would be
likely to stimulate increased sales of the vehicles. To forestall such an outcome, they
requested that the allowance be modified so that heavy-duty SUVs no longer
qualified for it. According to critics, the federal government was not protecting or
promoting the public interest by granting a tax subsidy for the purchase of motor
vehicles intended for business use that, in their view, received poor gas mileage,
emitted high concentrations of air pollutants, and posed significant safety hazards to
their own occupants and to passengers in other vehicles.3
Evidently, the 108th Congress paid attention to these objections, for it included
a provision to curtail the preference in the final tax bill it passed, the American Jobs
Creation Act of 2004 (AJCA, P.L. 108-357). Under the provision, the expensing
allowance for SUVs not subject to the depreciation limitations for passenger cars
under IRC section 280F was limited to $25,000 for SUVs placed in service after
October 22, 2004.
This report examines how the federal tax code treats the purchase of heavy-duty
SUVs for business use and discusses proposals in the 109th Congress that would
further change this treatment. Two statutory provisions make up the core of the
report: the expensing allowance under IRC section 179 and the “gas guzzler” excise
tax on domestic sales of new automobiles under IRC section 4064.


2 See Robert Schoenberger, “Excursion May Get Stay of Execution; High Profit Margin
Offsets Low Unit Sales,” The Courier-Journal, Oct. 29, 2003, p. 1F.
3 See Aileen Roder and Lucas Moinester, “A Hummer of a Tax Break,” Taxpayers for
Common Sense (Washington: Jan. 23, 2003); Pamela Najor, “Tax Cut Bill ‘Bad Policy’,
Group Says, Creating Perverse Incentives for SUVs,” Daily Report for Executives
(Washington: Bureau of National Affairs, May 28, 2003), p. G-7; and “Make Fuel-Efficient
SUVs a Go, But Stop Tax Break,” editorial, Atlanta Journal-Constitution, Oct. 27, 2003,
p. 10A.

Domestic Demand for SUVs and the Debate
Over Their Welfare Effects
Sport utility vehicles are classified as light trucks in existing data on domestic
motor vehicle sales and production. In 2004, U.S. motor vehicles sales totaled
17.299 million units.4 Of that number, light trucks accounted for 54%, followed by
passenger cars (43%) and medium and heavy trucks (2.5%). Sales of light trucks
exceeded those of passenger cars for the first time in 2001. In 1992, by contrast, the
share of passenger cars was nearly double that of light trucks: 63% to 35%.
Propelling the sharp rise in the light-truck share of domestic motor vehicle sales
from the early 1990s through the early 2000s was the increasing popularity of SUVs.
U.S. sales of SUVs jumped from less than 1 million units in the early 1990s to
around 4.5 million units in 2003.5 Automobile manufacturers contributed to this
growth by spending large sums on developing, producing, and marketing these
vehicles.6 As one might expect, this investment was driven by the prospect of
reaping substantial profits. In 1998, the Ford Motor Company reportedly earned
about $2.4 billion in after-tax profits from sales of just two of its SUV lines, the
Expedition and Navigator.7 An analyst estimated that an SUV with a 2003 sticker
price of $50,000 might yield a profit of $20,000 or more, whereas the profit on a
minivan would be about one-tenth as much.8
Growth in domestic sales of SUVs appears to have slackened in both 2004 and
2005, though a lack of data from public sources makes it difficult to gauge the extent
of the slowdown. During that period, what might be described as a growing split
emerged within the domestic SUV market between full-size or heavy-duty SUVs and
crossover SUVs. Sales of the former have been falling, while sales of the latter have
been rising. In 2005, for example, U.S. purchases of large SUVs were 13.1% below
the level in 2004, whereas purchases of crossover SUVs increased 13.5%.9 A variety
of factors explain the drop in sales of full-size SUVs. Foremost among them are the
advanced age of the design of the current crop of large SUVs, and changing tastes
among car buyers — driven partly by a rising concern about excessive energy
consumption and the upward spike in gasoline prices in 2004 and 2005. Nonetheless,
at least one market research firm, J.D. Power and Associates, is predicting a rebound


4 Standard & Poor’s, Industry Surveys: Autos & Auto Parts (New York: Dec. 22, 2005), p.

3.


5 Brett Clanton, “SUV Glut Signals Dip in Interest,” Detroit News, Aug. 13, 2004, p. A1.
6 Spending on SUV advertising in the United States rose from $172.5 million in 1990 to
$1.51 billion in 2000. See Keith Bradsher, High and Mighty (New York: Public Affairs,

2002), p. 112.


7 Ibid., p. 89.
8 Jonathan Weisman, “Businesses Jump on an SUV Loophole; Suddenly $100,000 Tax
Deduction Proves a Marketing Bonanza,” Washington Post, Nov. 7, 2003.
9 Karen Lundegaard, “A New Generation of SUVs; Sales of ‘Crossovers’ Expected to
Outstrip SUVs This Year; Latest Models Get Wider and Longer,” Wall Street Journal, Jan.

10, 2006, p. D1.



in domestic sales of large SUVs in 2006 and 2007 to levels seen in 2001 to 2003,
driven by the advent of new models of full-size SUVs offering improved fuel
economy. 10
The enormous growth in domestic ownership of SUVs since the early 1990s has
fueled a lively debate over their effects on highway safety, air quality, and U.S.
reliance on foreign sources of crude oil and petroleum products, among other
concerns.11 Critics charge that SUVs, especially the full-size models, wastefully
consume gasoline, contribute more to air pollution and global warming than
passenger cars, and pose a significant threat to the safety of their own passengers —
as well as other people on the road. Owners of the vehicles retort that large SUVs
offer greater protection to passengers than do smaller vehicles and are much safer
than critics contend. They also argue that in a democratic society with a free-market
economy, consumers should be allowed to own heavy-duty motor vehicles if they
value personal safety more than gas economy.
Sorting fact from fiction in the debate about the welfare effects of SUVs can be
a challenge. A careful review of the literature on these effects reveals that SUVs
have accounted for an increasing share of total fuel consumption and emissions by
motor vehicles in the past decade or so. On average, their gas mileage has been
lower, their emissions of carbon monoxide and nitrogen oxides higher, and their risk
of rolling over in an accident greater than most passenger cars.12 In addition,
compared to passenger cars, SUVs face less stringent federal standards for fuel
economy and emissions, and their safety record is thought to receive less scrutiny
from federal agencies.13 But several public announcements in recent years by both
federal regulatory agencies and manufacturers of SUVs hold the promise that these
discrepancies might shrink or disappear in coming years.14


10 Standard & Poor’s, Autos & Auto Parts, p. 10.
11 For an overview of the principal arguments made by proponents on both sides of this
debate, see Cooper, “SUV Debate,” pp. 451-461; Gregg Easterbrook, “America’s Twisted
Love Affair With Sociopathic Cars,” New Republic, vol. 228, Jan. 20, 2003, pp. 27-34; and
Sam Kazman, “Is Big Bad?: SUV Critics Hold Consumers in Contempt,” Reason,
Aug./Sept. 2003, available at [http://www.cei.org].
12 Cooper, “SUV Debate,” pp. 453-458.
13 See Cooper, “SUV Debate,” p. 454; and CRS Report RS20298, Sport Utility Vehicles,
Mini-Vans, and Light Trucks: An Overview of Fuel Economy and Emissions Standards, by
Brent D. Yacobucci.
14 The Environmental Protection Agency issued a final rule in February 2000 that beginning
with the 2009 model year (MY), all light trucks, including SUVs, will be held to the same
emissions standards as passenger cars (see 65 Federal Register 6698, Feb. 10, 2000).
In addition, in December 2002, the National Highway Traffic Safety Administration
(NHTSA) proposed that starting with MY2005, all light trucks, including SUVs, will be
subject to higher fuel economy standards. Under the rule, their average fuel economy would
rise from the current requirement 20.7 miles per gallon (mpg) to 21.0 mpg in MY2005, 21.6
mpg in MY2006, and 22.2 mpg in MY2007 (see 67 Federal Register 77015-77029, Dec. 16,

2002). NHTSA announced in April 2003 that the rule had been adopted.


On March 29, 2006, NHTSA released a final rule setting new and higher fuel economy
(continued...)

Depreciation of Motor Vehicles Under
the Federal Tax Code
A logical starting point for an examination of how the federal tax code affects
the purchase of heavy-duty SUVs is the tax treatment of depreciation for motor
vehicles in general and passenger cars in particular. Within this treatment lies the
most important tax subsidy for the purchase of these SUVs for business use. It is
difficult to comprehend the nature of this subsidy without having a good grasp of the
current rules for recovering the cost of motor vehicles bought mainly for business
use.
In general, business taxpayers — C corporations, shareholders of S corporations,
members of partnerships and limited liability corporations, and sole proprietors —
are allowed to deduct all ordinary and necessary expenses they incur in determining
their taxable income in a particular tax year. One such expense is depreciation,
which represents the decline in the economic value of tangible and intangible
business assets resulting from wear and tear and obsolescence. Under current tax
law, the cost of a depreciable asset such as a building, patent, light truck, or machine
tool is recovered over a specified period (known as the asset’s tax life) using an
allowable method of depreciation (e.g., the straight-line or double-declining balance


14 (...continued)
standards for light-duty trucks in the model years from 2008 to 2011. Under the rule, the
current corporate average fuel economy (CAFÉ) standards for light trucks are revised so that
they cover vehicles (including SUVs) weighing up to 10,000 pounds; the previous standards
applied to light trucks that weighed up to 8,500 pounds. Pickup trucks weighing more than

8,500 are exempt from the new standards. The new standards depend on a vehicle’s size,


as measured by its so-called footprint, which is the product of multiplying the vehicle’s
wheelbase by its track width. Light trucks with smaller footprints have higher standards
than larger footprints. Manufacturers of light trucks have the choice of complying with the
revised CAFÉ standards or the previous standards during the transition period of MY2008
to MY2010. Starting in MY2011, all manufacturers must comply with the revised
standards.
Finally, in early December 2003, 15 automobile makers from four nations voluntarily
agreed to redesign the SUVs and pick-up trucks they sell in the United States to make them
less dangerous to the occupants of passenger cars. The announced design changes are to be
phased in so that all MY2010 light trucks will incorporate them. Many of the largest SUVs
and pick-up trucks sold domestically will need to be redesigned. Because the action is being
taken voluntarily, it is unclear what role federal regulatory agencies will play in the redesign
effort. (See Danny Hakim, “Automakers to Redesign S.U.V.’s to Reduce Risks,” New York
Times, Dec. 4, 2003, p. A1; and Lorrie Gilbert, “Automakers Announce Plans to Improve
Designs for Vehicle Occupant Protection,” Daily Report for Executives, Bureau of National
Affairs, Dec. 5, 2003, p. A-37.)

methods).15 This period may or may not match an asset’s actual useful life, which
is often difficult to gauge.
Usually in a bid to spur increased business investment, governments sometimes
permit business taxpayers to recover the cost of specified depreciable assets well
before their economic value has been exhausted. Such an acceleration in the rate of
depreciation for tax purposes encourages firms to invest more in the favored assets
than they otherwise would, setting the stage for faster economic growth in the short
term. But the economic gains arising from accelerated depreciation often come with
significant economic costs. Specifically, such depreciation distorts the allocation of
economic resources by encouraging investment in favored assets at the expense of
other assets offering higher pre-tax rates of return on investment, and into industries
that intensively use the tax-favored assets at the expense of other industries where
pre-tax rates of return on investment may be higher. Accelerated depreciation has
these unwanted efficiency effects mainly because it lowers the user cost of capital for
investment in favored assets relative to the user cost of capital for investment in other
assets, all other things being equal.
The cost of most tangible depreciable business assets placed in service after
1986 is recovered under what is known as the Modified Accelerated Cost Recovery
System (MACRS). Under this system, which was put in place by the Tax Reform
Act of 1986 (P.L. 99-514), new and used automobiles and light trucks (including
SUVs, vans, and minivans) used primarily in a trade or business are assigned a
recovery period of five years. Their cost may be recovered under any of the
allowable depreciation methods, the most advantageous of which is the double-
declining balance method. Nevertheless, as is explained below, an exception to this
treatment is made for passenger cars used primarily in a trade or business that are
regarded as luxurious under the federal tax code.
Except for luxury passenger cars, the cost of motor vehicles bought mainly for
business use may also be expensed under section 179 of the Internal Revenue Code
(IRC).16 Generally, expensing involves writing off or deducting the full cost of a
depreciable asset in the year when it is placed into service, regardless of the asset’s
useful life. As a result, expensing is the most accelerated form of depreciation.


15 Generally, most depreciable tangible assets placed in service after 1986 are depreciated
under a system known as the Modified Accelerated Cost Recovery System (MACRS).
Under MACRS, the cost of an asset is recovered by applying the proper depreciation
method, the proper recovery period, and the proper convention. A taxpayer may choose to
use the straight-line method, which involves writing off the same amount of the asset’s
acquisition cost in each year of its recovery period; its basic rate is equal to one divided by
the number of years in the recovery period. Otherwise, the cost of assets in the 3-, 5-, 7-,
and 10-year classes is recovered using the 200% or double-declining balance method.
Under this method, the basic rate of depreciation is simply twice that of the straight-line
method. The cost of assets in the 15- and 20-year classes is recovered using the 150%
declining balance method, whose basic rate is 1.5 times larger than that of the straight-line
method. Longer-lived assets must be depreciated using the straight-line method.
16 For more details on the expensing allowance, see CRS Report RL31852, Small Business
Expensing Allowance: Current Status, Legislative Proposals, and Economic Effects, by
Gary Guenther.

Owing to changes in section 179 made by JGTRRA and AJCA, business taxpayers
may expense in a single tax year more than $100,000 of the cost of qualified assets
placed in service from 2003 through 2007.17 Before JGTRRA, the maximum
expensing allowance in that period was set at $25,000. With a few minor exceptions,
qualified assets are defined as new and used business machines and equipment
(including most motor vehicles) and packaged or off-the-shelf software used in the
active conduct of a trade or business. The amount that a business taxpayer may
expense is subject to two important limitations: a dollar limitation and an income
limitation. Under the dollar limitation, the maximum expensing allowance is
reduced, dollar for dollar, by the amount by which the total cost of qualified property
placed in service in a tax year exceeds a phase-out threshold of more than $400,000
from 2003 through 2007.18 The threshold was fixed at $200,000 in that period before
the enactment of JGTRRA. Under the income limitation, the expensing allowance
cannot exceed the taxable income a taxpayer earns from the active conduct of the
trade or business in which the qualified assets are employed. Assuming no change
in current law, the maximum expensing allowance will revert to $25,000 and the
phase-out threshold to $200,000 in 2008 and beyond.
The expensing allowance is regarded as an investment tax subsidy for smaller
firms for a simple reason: the phase-out threshold effectively restricts use of the
allowance to firms that are relatively small in asset, employment, or revenue size.
In addition, new (but not used) motor vehicles used primarily in a trade or
business were among the business assets that qualified for temporary first-year
depreciation deductions of 30% under the Job Creation and Worker Assistance Act
of 2002 (JCWAA, P.L. 107-147) and 50% under JGTRRA. The 30% deduction
applied to qualified property acquired after September 10, 2001, and before January
1, 2005, and placed in service before January 1, 2005;19 the 50% deduction applied
to the same set of assets acquired after May 5, 2003, and before January 1, 2005, and
placed in service before January 1, 2005. Business taxpayers could claim either
deduction, but not both. In effect, they operated as partial expensing allowances, and


17 This amount is indexed for inflation in 2004 through 2007. As a result, the maximum
expensing allowance for firms operating outside enterprise and empowerment zones and
other designated areas was $102,000 in 2004 and $105,000 in 2005.
18 This amount is also indexed for inflation in 2004 through 2007. As a result, the phase-out
threshold for firms operating outside enterprise and empowerment zones and other
designated areas was $410,000 in 2004 and $420,000 in 2005.
19 The 30% and 50% temporary depreciation allowances were available for new assets that
were depreciable under the MACRS and had recovery periods of 20 or fewer years. They
also applied to water utility property, computer software that was depreciable over three
years under IRC Code 167, and qualified leasehold improvements.
Some property can be placed in service in 2005 still qualify for the allowances.
Specifically, the property must be produced by a business taxpayer and subject to the
uniform capitalization rules under IRC Section 263A, have a production period of more than
two years or more than one year and a cost exceeding $1 million, and have a recovery period
under the MACRS of at least 10 years or be used in the business of transporting people for
hire.

firms of all asset, employment, or revenue sizes and forms of legal organization were
able to benefit from them.
Although the depreciation of motor vehicles in general is governed by the rules
of the MACRS and the expensing allowance, the cost of so-called luxury passenger
cars used primarily for business is recovered under a different set of rules. More
specifically, the depreciation allowances for those cars are subject to annual limits
under IRC section 280F, limits that may extend the tax life of a passenger car far
beyond five years. This statutory provision, which entered the federal tax code
through the Deficit Reduction Act of 1984 (P.L. 98-369), establishes a separate
category of tangible depreciable assets known as listed property. In general, listed
property embraces assets whose nature or purpose makes it possible to use them for
both business and personal purposes. Under current law, passenger cars and other
transportation equipment; property used in entertainment, recreation, or amusement;
computers and peripheral equipment; and cellular telephones and similar
telecommunications equipment are considered listed property. There are specific
dollar limits on the depreciation allowances that may be claimed for each type of
listed property in a single tax year, assuming business use accounts for 50% or more
of total use of the property.20 If business use accounts for 100% of a listed property’s
use, then the maximum depreciation allowance may be claimed for a tax year. But
if business use represents less than 100% of the property’s use, then the depreciation
allowance must be adjusted to reflect the business share of total use.21
In the case of luxury passenger cars, the limits under IRC section 280F represent
the maximum depreciation deductions that may be claimed under a combination of
the MACRS, the IRC section 179 expensing allowance, and the temporary 30% and
50% first-year depreciation deductions established by JCWAA and JGTRRA (if
applicable). For example, a business taxpayer may claim a maximum first-year
depreciation allowance of $10,610 (if he or she claims the 50% bonus depreciation)
for a new passenger car placed in service in 2004; the maximum first-year allowance
falls to $2,960 for a new passenger car placed in service in 2005, when the bonus
depreciation no longer was available.22 Higher limits apply to electric passenger
vehicles built by an original equipment manufacturer and placed in service after
August 5, 1997, and before January 1, 2007: the maximum first-year allowance for
such a vehicle placed in service in 2005 is $8,880.
The limits went into effect in 1984 and have been adjusted for inflation since
1988. Although their original intent was to discourage the purchase of expensive
cars for business use, the limits no longer effectively serve this purpose because they


20 If business use of listed property drops below 50% of total use, the property must be
depreciated under the MACRS alternative depreciation system (ADS), which tends to be
much less generous than the regular MACRS. Property whose cost is recovered under the
ADS is not eligible for the 30% or 50% temporary first-year depreciation allowances under
JCWAA and JGTRRA, respectively.
21 For example, if the business share of total use for a passenger car is 75%, then the
depreciation deduction that may be claimed in a particular tax year is 75% of the maximum
allowed under IRC section 280F.
22 See IRS Revenue Procedure 2005-13.

have not kept pace with increases in the cost and improvements in the quality and
design of passenger cars.23 The federal tax code does not define a luxury passenger
car; instead, the worth of such a vehicle is determined on the basis of the total
depreciation allowances under IRC section 280F during the first five years a
passenger car is used for business purposes. For example, any passenger car placed
in service in 2005 whose purchase price was $13,860 or more was deemed a luxury
car under IRS regulations.
Depreciation of SUVs Under the Federal Tax Code
The tax treatment of depreciation for an SUV hinges on the vehicle’s weight and
design. Depending on its weight and the type of chassis upon which it is built, an
SUV may be classified — for tax purposes — as either a passenger car or a light
truck. This distinction is hardly trivial, as it can affect the number of tax years
required to recover the cost of an SUV and the after-tax cost of the vehicle.
As discussed in the previous section, current federal tax law imposes annual
limits on depreciation allowances for luxury passenger cars. The tax code defines
passenger cars as four-wheeled vehicles built on a car chassis and made primarily for
use on public streets, roads, and highways and having an unloaded gross vehicle
weight (i.e., curb weight fully equipped for service but without passengers or cargo)
of 6,000 pounds or less. Under this definition, trucks, vans, minivans, and SUVs
built on an automobile chassis with a gross vehicle weight (i.e., maximum total
weight of a loaded vehicle as specified by the manufacturer) of 6,000 pounds or less
should be subject to the same depreciation limits as passenger cars. But this is not
the case for all such vehicles. Trucks (including SUVs) and vans placed in service
after July 7, 2003, weighing 6,000 pounds or less, and built on a car chassis are
exempt from the depreciation limits for passenger cars if they satisfy the requirements
for a “qualified personal use vehicle.” Such a vehicle is defined as a truck or van
that has been modified in such a way that it is unlikely to be used for personal
purposes. Examples of such vehicles are marked police or fire vehicles, delivery
trucks with seating only for the driver, flatbed trucks, and refrigerated trucks.24 A
different set of depreciation caps under IRC section 280F applies to light trucks
(including SUVs), minivans, and vans weighing 6,000 pounds or less built on a truck


23 See U.S. Congress, Joint Committee on Taxation, General Explanation of the Revenue
Provisions of the Deficit Reduction Act of 1984, JCS-41-84 (Washington: GPO, 1985), pp.

559-560.


24 See Temporary Reg. §1.275-5T(k). Under temporary rules (T.D. 9069) issued by the
Internal Revenue Service on July 7, 2003, certain vans and light trucks weighing 6,000
pounds or less have not been treated as passenger cars for tax purposes since the 2003 tax
year. More specifically, the exclusion applies to vans and light trucks that are modified for
business use in a way that precludes any personal use. The rules were issued in response
to numerous complaints from small business owners that current dollar limits on
depreciation deductions for passenger cars were making it impossible to write off the cost
of a basic model van or light truck in the five years permitted under MACRS.

chassis and placed in service after 2002.25 These caps are higher than the ones for
passenger cars: for such a light truck placed in service in 2005, the maximum first-
year depreciation allowance is $3,260, compared to a first-year allowance of $2,960
for passenger cars.
SUVs, trucks, vans, and minivans built on a truck chassis with a gross vehicle
weight of more than 6,000 pounds are considered light trucks for tax purposes and
thus exempt from the depreciation limitations for luxury passenger cars under IRC
section 280F.26 The exemption originated with the Deficit Reduction Act of 1984
and was initially intended to allow owners of heavy-duty working vehicles used in
farming or construction or other trades or businesses to recover the cost of these
vehicles much faster than would be possible under IRC section 280F. Business
taxpayers owning vehicles eligible for the exemption can recover their cost under the
regular depreciation rules for motor vehicles. This means, in the case of a business
owner who bought a light truck and placed it in service in 2005, that the owner may
claim a depreciation allowance based on the rules of the IRC section 179 expensing
allowance and the MACRS. As noted above, small business owners, including self-
employed individuals, are the taxpayers most likely to claim the expensing
allowance.
A provision of AJCA modified IRC section 179 to limit the expensing
allowance that may be claimed for SUVs built on a truck chassis with a gross vehicle
weight of more than 6,000 pounds. Specifically, it limits the amount of the cost of
SUVs with a gross vehicle weight of more than 6,000 pounds and less than 14,000
pounds that may be expensed to $25,000.27 This limitation applies to vehicles placed
in service after October 22, 2004. Under the provision, SUVs are defined as any
four-wheeled vehicle designed mainly “to carry passengers over public streets, roads,
or highways” that are exempt from the depreciation caps under IRC section 280F and
whose gross vehicle weight does not exceed 14,000 pounds. Because this definition
could apply to many pickup trucks, vans, and small buses, the provision further
refines it so that many of these vehicles are eligible for the regular expensing
allowance of over $100,000.28 Despite this refinement, it appears that pickup trucks


25 See IRS Revenue Procedure 2003-75.
26 SUVs belonged to this category of vehicles before the enactment of the American Jobs
Creation Act of 2004.
27 Under JGTRRA, the maximum expensing allowance for SUVs weighing more than 6,000
pounds was not less than $100,000. So any such SUV bought and placed in service from
January 1, 2004, through October 22, 2004, was eligible for that allowance. AJCA reduced
it to the amount that was in effect in 2003 before the enactment of JGTRRA.
28 The following vehicles are excluded from the definition of SUVs under IRC Section
179(b)(6)(B)(i) and thus not subject to the limitation it imposes on the expensing allowance
for heavy-duty SUVs: (1) those designed to have a seating capacity of more than nine
persons behind the driver’s seat; (2) those equipped with a cargo area of at least six feet in
length that is an open area and is not readily accessible from the passenger compartment;
(3) those equipped with a cargo area of at least six feet in interior length that is designed for
use as an open area but is enclosed by a cap and is not readily accessible directly from the
passenger compartment; and (4) those with an integral enclosure spanning the driver
(continued...)

with a cargo bed of less than six feet and weighing more than 6,000 pounds and most
passenger vans weighing more than 6,000 pounds are subject to the $25,000 limit.
Accelerated Depreciation and Demand
for Heavy-Duty SUVs
How does the current tax treatment of depreciation for motor vehicles affect
domestic demand for SUVs? This question cannot be answered with precision
because of the many factors that influence sales and the difficulty of isolating the
effects of a single factor. Nonetheless, there is no question that current depreciation
rules favor the purchase of heavy-duty SUVs over lighter SUVs or passenger cars of
comparable value. Supporting evidence can be found in the greater tax benefit to
business taxpayers from buying an SUV exempt from the depreciation caps on luxury
passenger cars than from buying a vehicle subject to those caps. This added benefit
stems from the accelerated depreciation for heavy-duty SUVs available under IRC
section 179. The allowance for these vehicles expanded under JGTRRA but
contracted under AJCA to what it was when JGTRRA was enacted.
The figures in Table 1 illustrate the greater tax benefit from purchasing a large
SUV for business use. It can be seen in a comparison of the maximum first-year
depreciation deductions and the present value of total depreciation allowances (in
2005 dollars) — and the present value of the tax savings associated with these
allowances — a non-corporate business taxpayer is allowed to claim as a result of
placing in service in 2005 a new SUV weighing over 6,000 pounds but not more than29
14,000 pounds, or a new passenger car of equal value. The comparisons are made
under the depreciation rules that were in effect both before and after the enactment
of AJCA. In computing the depreciation deductions, it is assumed that each vehicle
is driven solely for business purposes, the taxpayer earned at least $40,000 in 2005
from the trade or business in which the vehicle is used, and the double-declining
balance method of depreciation with the half-year convention is used. In computing
the present value of the total depreciation allowances claimed for each vehicle and
the associated tax savings, it is further assumed that the discount rate is 4.3, which
was the average rate for 10-year Treasury bonds in 2005.


28 (...continued)
compartment and load-carrying device, no seating behind the driver’s seat, and no body
section protruding more than 30 inches ahead of the leading edge of the windshield.
29 Comparing first-year depreciation allowances offers a useful frame of reference because
the tax savings caused by accelerated depreciation depends on the proportion of an asset’s
acquisition cost recovered in the first year or two of its tax life. These benefits increase as
the proportion expands and a depreciable asset’s tax life shrinks. The fundamental reason
lies in the time value of money and the tax deferral made possible by accelerated
depreciation: tax savings realized today are more valuable than the same amount of tax
savings realized over five or 10 years.

Table 1. First-Year Depreciation Deductions and Present Value
of Total Depreciation Deductions and Total Tax Savings for a
Large SUV and a Passenger Car Placed in Service in 2005
VehicleNew Heavy-Duty SUVNew PassengerCar
Assumed Curb Weight (pounds) 6,4003,200
Purchase Price$40,000$40,000
Maximum First-Year DepreciationaUnder theUnder the Jobs$2,960
AllowanceAmerican Jobsand Growth Tax
Creation Act ofbRelief
2004 Reco nc iliatio nc
Act of 2003
$28,000$40,000
Years Required to Recover the6121
Acquisition Costd
Present Value of Total$37,327$38,351$27,638
Depreciation Deductions (2005
dollars)e
Present Value of Total Tax13,06413,4239,670
Savings (2005 Dollars)e
After-Tax Cost of the Vehiclef26,93626,57730,330
Source: Congressional Research Service
a. The passenger car is subject to annual limits on depreciation deductions under IRC Section 280F.
The SUV is not subject to any such limits and thus is eligible for the maximum expensing
allowance allowed under IRC section 179, and the regular depreciation allowance under the
M ACRS.
b. The figures in this column reflect the current limit of $25,000 on the maximum expensing allowance
in a single tax year for an SUV with a gross vehicle weight of over 6,000 pounds but less than
14,000 pounds. This limit was established by the American Jobs Creation Act of 2004.
c. The figures in this column reflect the limit of $102,000 on the maximum expensing allowance in
2004 for SUVs with a gross vehicle weight of more than 6,000 pounds. This limit was in effect
before the enactment of the American Jobs Creation Act of 2004.
d. According to IRS Revenue Procedure 2005-13, the maximum depreciation allowance in 2005 for
a passenger car placed in service that year was $2,960, followed by $4,700 in 2006, $2,850 in
2007, and $1,675 in each succeeding year. The SUV is depreciated using the double-declining
balance method with a half-year convention.
e. In estimating the present value of total depreciation allowances, it is assumed that the discount rate
is 4.3%.
f. The purchase price less the present value of the tax savings from the depreciation allowances.



The results imply that a business owner would realize a higher after-tax return
on investment — and perhaps a greater cash flow in the short run — by purchasing
the SUV instead of the passenger car. Such an inference is warranted because of the
differences in the present value of total allowable depreciation deductions and the
present value of the associated tax savings among the three cases. In general, the
greater the present value of these deductions, the greater the tax savings from
purchasing a depreciable asset; and the greater the tax savings, the lower the tax
burden on the returns to investment in the asset. These savings lower the effective
price of a depreciable asset.30 The present value (in 2005 dollars) of total
depreciation allowances for the SUV under JGTRRA ($40,000) is 45% greater than
the present value of depreciation allowances for the passenger car; and the present
value for the SUV under current law is 35% greater than that for the passenger car.
Although the buyer eventually recovers the acquisition cost of each vehicle, the
passenger car yields the lowest tax savings (in current dollars) because it takes 20
years more than the SUV under JGTRRA and 15 years longer than the SUV under
current law to recover that cost.
Some may find it surprising that there is only a 7% difference between the
present value of total depreciation allowances for the SUV under current tax law and
the present value of depreciation allowances under JGTRRA. After all, AJCA
reduced the maximum expensing allowance for heavy-duty SUVs from over
$100,000 to $25,000. If anything, this result suggests that the decrease in the
maximum expensing allowance for heavy-duty SUVs under AJCA did little to curtail
the tax preference for buying these vehicles under current depreciation rules.
Is there any evidence that the tax preference for heavy-duty SUVs under current
depreciation rules has boosted their domestic sales? What evidence is available from
public sources seems inconclusive. On the one hand, domestic sales of full-size and
luxury SUVs exhibited surprising strength in December 2003 and January 2004, and
some analysts ascribed this strong showing, in part, to the availability of the
$100,000 expensing allowance, heightened efforts by dealers to make customers
aware of it through local advertising campaigns, and the widespread belief that
Congress would act soon to eliminate or curtail this tax preference.31 On the other
hand, U.S. sales of the heaviest SUVs declined by 6% in 2004 compared to 2003,
even though for more than 10 months of the year the maximum expensing allowance
for the vehicles was $102,000.32
The decision to purchase a motor vehicle mainly for business use obviously
hinges on more factors than the tax treatment of its depreciation. Of particular
importance in the case of small business owners are the income and tastes of the
buyer; the current price of gasoline and expected trends in this price in coming years;
and the cost, gas mileage, safety features, and repair record of the vehicles being


30 See Harvey S. Rosen, Public Finance, 7th ed. (New York: McGraw-Hill Irwin, 2005), p.

432.


31 See Jim Hopkins, “SUV Sales Climb on Tax Loophole; Small Businesses Discover
Benefit,” USA Today, Feb. 11, 2004, p. B3.
32 Brett Clanton, “Large SUVs Lose Luster, Cost Big 3,” Detroit News, Jan. 16, 2005,
available at [http://www.detnews.com].

considered. Assessing the effect of a change in depreciation rules on domestic sales
of a motor vehicle when some or all of the other important factors affecting sales
trends are changing at the same time is a difficult challenge. Nonetheless, it seems
reasonable to assume that domestic demand for heavy-duty SUVs is greater than it
would be if the tax code were to treat the depreciation of these vehicles and passenger
cars in the same manner. What is uncertain is how much greater.
Public policy in a variety of areas — especially energy use, taxation,
environmental protection, highway safety, and oil import dependence — could
benefit from a study that evaluates the extent to which the tax preference for large
SUVs embedded in the depreciation rules boosts domestic demand for them, and the
social costs and benefits of the added sales attributable to the preference.
Gas Guzzler Excise Tax
The tax treatment of depreciation for heavy-duty SUVs is not the only way in
which the federal tax code encourages the purchase of these vehicles. IRC section
4064, which levies an excise tax on domestic sales of new automobiles that do not
meet statutory fuel economy standards, may offer small business owners (and other
consumers) another incentive to prefer heavy-duty SUVs to motor vehicles that are
more efficient in fuel consumption. This tax is known as the gas guzzler tax.
The gas guzzler tax originated with the Energy Tax Act of 1978 (P.L. 95-618),
and the IRS issued the first regulations to implement it in 1980. It applies to
domestic sales of automobiles by manufacturers and importers, who are required to
pay the tax. IRC section 4064(b) defines an automobile as any “four-wheeled vehicle
propelled by fuel which is manufactured primarily for use on public streets, roads,
and highways.” Until the passage of the Safe, Accountable, Flexible, Efficient
Transportation Equity Act: A Legacy for Users (SAFETEA-LU, P.L. 109-59) in
August 2005, the definition of automobiles also stipulated that such vehicles have an
unloaded gross vehicle weight of 6,000 pounds or less; the act repealed this weight
limitation, subjecting all vehicles meeting the remaining criteria for an automobile
to the tax, irrespective of their weight. Certain vehicles are exempt from the tax:
namely, emergency vehicles such as ambulances and police cars, cars with a gas
mileage rating of 22.5 miles per gallon (mpg) and over, and all light trucks (including
SUVs of all weights). Whether a gas guzzler tax is owed — and if so, the amount
of the tax — depends on an automobile’s combined city and highway fuel economy
rating, which is defined as the average number of miles traveled by an automobile per
gallon of gasoline as determined by the Environmental Protection Agency. The
current tax ranges from $1,000 for cars with a fuel economy rating of at least 21.5
miles per gallon but less than 22.5 miles per gallon to $7,700 for cars with a rating
of less than 12.5 miles per gallon. These amounts have been in effect since the
enactment of the Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508). In
FY2004, the tax raised $141 million in revenue, up from $71 million in FY2000.
The tax arguably serves two intertwined policy goals. It promotes the
development, manufacture, and sale of fuel-efficient cars by raising the average cost
of producing cars subject to the tax relative to that of cars exempt from the tax. At



the same time, the tax mitigates the negative external effects of driving relatively
fuel-inefficient cars. Prominent among these effects is the added air pollution from
driving such vehicles. To the extent that the burden of the gas guzzler tax is borne
by manufacturers and importers, it compels them to pay for some of these costs.
The Gas Guzzler Tax and the Demand
for Heavy-Duty SUVs
As noted above, the gas guzzler tax does not apply to SUVs. As a result,
demand for heavy-duty SUVs is likely to be greater than it would be if they were
subject to the tax and buyers were forced to bear its burden. Since most heavy-duty
SUVs get relatively low gas mileage, retail prices could be as much as $4,500 to
$7,700 higher for many models if current law were changed to subject them to the tax
and importers, manufacturers, and dealers were to pass the full amount of the tax on
to buyers.
It appears that considerable revenue could be raised by modifying the tax so that
it applies to all light trucks (including SUVs). According to one estimate, the U.S.
Treasury lost about $10 billion in revenue in 1999 because of the exemption of light
trucks from the tax.33 Domestic sales of these vehicles totaled 9.4 million units in
2004, or 1.2 million units more than the total for 1999. Unfortunately, the data
needed to estimate the additional revenue that would have been raised if the tax had
applied to all light vehicles sold in the United States in 2004 are not available from
public sources and would be costly to obtain from private sources.
How would domestic demand for heavy-duty SUVs be likely to respond to the
imposition of the gas guzzler tax? The answer hinges on the extent to which buyers
end up bearing the burden of the tax and the sensitivity of demand for those vehicles
to increases in retail prices. Although manufacturers and importers would be
required to pay the tax, there is no certainty that they would bear the entire burden by
accepting declines in the profits they earn from domestic SUV sales. Rather, they
would be likely to try to shift at least part of the tax to some combination of
employees (through lower compensation), suppliers of materials, parts, and
components (through lower prices), and buyers of heavy-duty SUVs (through higher
retail prices). The distribution of the burden between manufacturers and importers
on the one hand and buyers on the other hand ultimately hinges on the price
sensitivity (or elasticity) of demand and supply for heavy-duty SUVs. To maintain
their profit margins on sales of heavy-duty SUVs, manufacturers would want to pass
the entire amount of the tax on to buyers, but their resolve to do so would be
constrained by the prospect of losing large numbers of buyers in response to an


33 A 2000 study issued by the environmental advocacy group Friends of the Earth concluded
that domestic and foreign automobile manufacturers avoided paying $10.2 billion in gas
guzzler excise taxes in 1999 and $43.1 billion from 1995 through 1999 because of the
exemption of light trucks from the tax. It is not clear from the study what assumptions were
made in arriving at this estimate. See Friends of the Earth, Gas-Guzzler Loophole: SUVs
and Light Trucks Drive Off with Billions (Washington: 2000), available at
[ h t t p : / / www.f o e .or g] .

increase in prices because of the tax. In general, producers are more likely to bear
most of the burden of a tax like the gas guzzler excise tax if demand is more sensitive
to price changes than supply in the short run; but consumers are more likely to bear
most of the burden if demand is less sensitive to price changes than supply in the
short run. The data needed to estimate these sensitivities for heavy-duty SUVs are
not available from public sources and would be costly to obtain from private sources.
Legislative Initiatives in the 109th Congress to
Curtail or Eliminate SUV Tax Preferences
Several bills to curtail — directly and indirectly — current tax preferences for
heavy-duty SUVs have been introduced in the 109th Congress. It is uncertain whether
any of them will receive attention from the full House or Senate in coming months.
Efforts to curtail the preferences might encounter opposition from the automobile
industry and its allies in Congress. In light of the current federal budget deficit and
the prospect of larger deficits in the future, a key issue in congressional consideration
of any of these measures will be its likely revenue effects.
Four such bills would erase the tax preference for heavy-duty SUVs in current
depreciation rules by subjecting all SUVs with a gross weight of over 6,000 pounds
to 14,000 pounds to the annual depreciation limits for passenger cars under IRC
section 280F. The bills are H.R. 4384 (introduced by Representative Christopher
Shays on November 17, 2005), H.R. 4409 (introduced by Representative Jack
Kingston on November 18, 2005), S. 1852 (introduced by Senator Ken Salazar on
October 6, 2005), and S. 2025 (introduced by Senator Evan Bayh on November 16,
2005). There are some notable differences among the proposals. H.R. 4384 includes
a definition of SUV that would exclude many vans, minivans, and pickup trucks from
the depreciation limits. By contrast, H.R. 4409, S. 1852, and S. 2025 appear to
contain no such exclusion, but they would exempt “vehicles used in a farming
business” from the depreciation limits. In addition, they would increase the limits
and expand them to cover vehicles weighing between 6,000 and 14,000 pounds.
An indirect approach to lessening the tax advantages of purchasing heavy-duty
SUVs for business use is offered in S. 2345 (introduced by Senator Charles Grassley
on March 1, 2006). The bill would not change any of the tax preferences for these
vehicles, but it would exempt so-called alternative-energy vehicles from the
depreciation limits under IRC section 280F. As a result, small business owners could
depreciate such vehicles faster than they can depreciate a heavy-duty SUV under
current tax law. Alternative-energy vehicles include electric-powered cars, hybrid
cars that run on a combination of gas and electricity, and vehicles powered by an
alternative fuel such as compressed natural gas.34
Yet another indirect approach is taken by H.R. 2070 (introduced by
Representative Dennis Kucinich on May 4, 2005). Like S. 2345, it would not lower


34 Kurt Ritterpusch, “Finance Bill Would Increase Tax Incentives for Businesses Buying
Efficient Vehicles,” Daily Report for Executives, Bureau of National Affairs, March 2,

2006, p. G-17.



any current tax incentive for acquiring a heavy-duty SUV for business use. Rather,
it would create a new tax incentive to buy a fuel-efficient SUV assembled in the
United States, an incentive that any individual taxpayer could benefit from. The
incentive is a non-refundable personal tax credit of $4,500 for those who purchase
a qualified SUV with a rated gas mileage of 45 to 54 mpg; the credit would rise to
$6,000 in the case of a qualified SUV with a rated gas mileage of 55 mpg or over.
There are no bills in the 109th Congress to alter the gas guzzler tax so that it
would apply to SUVs.