Tax Incentives for Alternative Fuel and Advanced Technology Vehicles

CRS Report for Congress
Tax Incentives for Alternative Fuel and
Advanced Technology Vehicles
Brent D. Yacobucci
Specialist in Energy Policy
Resources, Science, and Industry Division
Summary
Alternative fuel and advanced technology vehicles face significant market barriers,
such as high purchase price and limited availability of refueling infrastructure. The
Energy Policy Act of 2005 (P.L. 109-58) expands and establishes tax incentives that
encourage the purchase of these vehicles and the development of infrastructure needed
to support them. Among the new provisions are tax credits for the purchase of hybrid
vehicles (replacing an existing tax deduction), tax credits for the purchase of advanced
diesel vehicles (although it is unclear whether any current vehicles will qualify), and tax
credits to expand refueling infrastructure. This report discusses current federal tax
incentives for alternative fuel and advanced technology vehicles. It also outlines how
the Energy Policy Act of 2005 changes those incentives. This report will be updated as
events warrant.
Introduction.¹ Alternative fuel and advanced technology vehicles face significant
barriers to wider acceptance as passenger and work vehicles. Alternative fuel vehicles
include vehicles powered by nonpetroleum fuels such as natural gas, electricity, or alcohol
fuels. Advanced technology vehicles include hybrid vehicles, which combine a gasoline²
engine with an electric motor system to boost efficiency. Often, these vehicles are more
expensive than their conventional counterparts.³ Further, fueling the vehicles is often
inconvenient because the number of refueling stations for alternative vehicles is negligible
compared with the number of gasoline stations nationwide; in some regions, the
infrastructure is nonexistent. However, many of these vehicles perform more efficiently

¹ This report supersedes CRS Report RS21277, Alternative Fuel Vehicle Tax Incentives and the
CLEAR ACT.
² For more information on these vehicles, see CRS Report RL30758, Alternative Transportation
Fuels and Vehicles, and CRS Report RL30484, Advanced Vehicle Technologies, by Brent D.
Yacobucci.
³ Some opponents of tax incentives argue that market barriers alone do not justify government
intervention. Proponents argue that there may be noneconomic reasons (e.g. energy security,
clean air) to promote one technology over another.
Congressional Research Service ˜ The Library of Congress

and are better for the environment than conventional vehicles. There has been significant
interest in promoting these vehicles as a response to environmental and energy security
concerns.
Current Tax Incentives (Through 2005).⁴ The Energy Policy Act of 1992 (P.L.
102-486, §1913) established individual and business tax incentives for the purchase of
alternative fuel and advanced technology vehicles and for the installation of alternative
fuel infrastructure. The Energy Policy Act of 2005 (P.L. 109-58) expands these existing
tax incentives and creates new ones. Incentives existing prior to P.L. 109-58 include
^!the Electric Vehicle Tax Credit;
^!the Clean Fuel Vehicle Tax Deduction; and
^!a tax deduction for the installation of alternative fuel infrastructure.
Electric Vehicle Tax Credit. For 2005, a federal tax credit is available worth

10% of the purchase price of an electric vehicle, up to a maximum of $4,000 (26 U.S.C.

30). The credit, which was not extended by the Energy Policy Act of 2005, will be
reduced to a maximum of $1,000 in 2006 and will be phased out completely after 2006.
Clean Fuel Vehicle Tax Deduction. For the purchase of alternative fuel
vehicles, as well as hybrid electric vehicles, a Clean Fuel Vehicle Tax Deduction (26
U.S.C. 179A) is available. The amount of the deduction is based on the weight of the
vehicle. Vehicles under 10,000 pounds gross vehicle weight (i.e., cars and light trucks)
qualify for a $2,000 deduction in 2005; those between 10,000 and 26,000 pounds qualify
for a $5,000 deduction. Vehicles above 26,000 pounds qualify for a $50,000 deduction.
The Energy Policy Act of 2005 terminates this deduction after December 31, 2005, and
replaces it with a tax credit (see below).
Prior to 2002, hybrid electric vehicles were not considered “clean-fuel vehicles”
because the primary fuel for the vehicles is gasoline. However, in May 2002, the Internal
Revenue Service (IRS) announced that taxpayers can claim the deduction for qualified
hybrids.⁵ As of December 2005, eight hybrid models are eligible for the deduction.
Fueling Infrastructure Tax Deduction. Businesses that install alternative fuel
refueling infrastructure can claim a tax deduction of up to $100,000 (26 U.S.C. 179A).
The Energy Policy Act of 2005 eliminates this deduction at the end of 2005 and replaces
it with a tax credit (see below).
New Tax Credits Under P.L. 109-58 (2006 and Beyond). The Energy Policy
Act of 2005 expanded and extended the existing tax incentives for nonconventional
vehicles. These new incentives are similar to those proposed in the Clean Efficient
Automobiles Resulting from Advanced Car Technologies Act (CLEAR ACT, S. 971) and
the Volume Enhancing Hardware Incentives for Consumer Lowered Expenses

⁴ For more information on the current tax incentives, see the Internal Revenue Service website
at [http://www.irs.gov]
⁵ Further, taxpayers who purchased hybrids in previous years may file an amended return to claim
the deduction.

Technology Act (VEHICLE Technology Act, H.R. 626), as well as legislation discussed
in the 108^th Congress.
Among other provisions, Sections 1341 and 1342 of the Energy Policy Act of 2005
contain several tax incentives for alternative fuel and advanced technology vehicles. For
example, the act
^!replaces the existing clean-fuel vehicle tax deduction with a new tax
credit for hybrid vehicles;
^!creates a tax credit for the purchase of lean-burn passenger vehicles;⁶
^!creates a new tax credit for the purchase of fuel-cell vehicles;
^!replaces the existing clean-fuel vehicle tax deduction with an alternative
fuel vehicle tax credit; and
^!replaces the existing deduction for the installation of refueling
infrastructure with a tax credit.
Each of these credits is discussed below; Table 4 summarizes each one.
Hybrid Electric Vehicle Tax Credit. Under the Energy Policy Act of 2005, the
existing clean-fuel vehicle deduction for hybrid electric vehicles is replaced with a tax
credit after 2005. The amount of the credit is based on several factors. For passenger
vehicles, these factors are the fuel economy increase and the expected lifetime fuel
savings when compared with a conventional vehicle of comparable weight. To qualify
for the credit, a hybrid vehicle must meet certain emissions standards and technical
specifications. For heavy-duty vehicles (more than 8,500 pounds), the credit is based on
the fuel economy relative to a comparable vehicle, as well as the incremental cost of the
hybrid vehicle above the cost of the conventional vehicle. The range of potential credits
for each vehicle weight are shown in Table 1. The hybrid vehicle credit is scheduled to
expire at the end of 2009.
Table 1. Hybrid Vehicle Tax Credit, by Gross Vehicle Weight
^{Up to 8,500 pounds}^{8,501 to 14,000}^po^unds^{14,001 to 26,000}^po^unds^M^o^{re than}^{26,000 pounds}
^{$400 t}^o^$3,400^a^{$0 t}^o^$3,750^b^{$0 t}^o^$7,500^b^{$0 t}^o^$15,000^b
^Source:^P.L^.^109-^{58, §1341.}
^a^.^D^e^p^e^ndⁱ^{ng o}ⁿ^fue^l^e^c^o^no^m^y^aⁿ^d^fue^l^sa^vi^ngs.
^{b. Depen}^dⁱⁿ^g^on^f^u^{el econ}^o^m^y^an^{d in}^crem^en^{tal cos}^t^.
The American Council for an Energy-Efficient Economy estimates that 2006 tax
credits for hybrid passenger vehicles will range from $0 (Honda Insight) to $3,150

⁶ Currently, these are exclusively diesel vehicles. Although lean-burn gasoline engines are
technically feasible, no vehicles with lean-burn gasoline engines (as defined by §1341 of the act)
are currently available.

(Toyota Prius).⁷ However, the IRS has not yet announced the value of the credits for

2006.

Lean-Burn Vehicle Credit. The Energy Policy Act of 2005 established a tax
credit for the purchase of passenger vehicles with “lean-burn” engines. For the most part,
diesel-powered vehicles that meet certain emissions and fuel economy standards would
qualify for the tax credit, which is structured like the hybrid tax credit and ranges from
$400 to $3,400, based on fuel economy and fuel savings. The credit is scheduled to
expire at the end of 2010.
However, no lean-burn passenger vehicles are available that meet the emission
standard. Consequently, no vehicles on the market qualify for the credit, although many
observers expect automakers to look for ways to reduce the emissions of such vehicles in
future years so that the vehicles can qualify.
Fuel-Cell Vehicle Purchase Tax Credit. The Energy Policy Act of 2005
provides a tax credit for the purchase of fuel-cell vehicles. The credit increases with gross
vehicle weight, as shown in Table 1. Passenger vehicles that achieve at least 50% better
fuel economy than a comparable conventional vehicle also qualify for an additional tax
credit of between $1,000 and $4,000, depending on overall fuel economy. The credit
expires at the end of calendar year 2014. However, because of technical and cost
concerns, no fuel-cell vehicles are commercially available, and the development of a
mass-market fuel-cell vehicle in the near future seems unlikely.
Table 2. Fuel-Cell Vehicle Tax Credit, by Gross Vehicle Weight
Up to 8,500 pounds8,501 to 14,000pounds14,001 to 26,000poundsMore than26,000 pounds
$8,000 ($4,000 after
2009), plus up to$10,000$20,000$40,000
$4,000, depending on
fuel economy
^Source:^P.L^.^109-^{58, §1341.}
Alternative Fuel Vehicle Tax Credit. The Energy Policy Act of 2005 replaces
the existing clean-fuel vehicle tax deduction with a credit for the purchase of a new
alternative fuel vehicle (AFV). The new credit is equal to a percentage of the incremental
cost of the AFV, subject to certain maximum dollar amounts. The incremental cost is the
difference between the higher cost of the AFV and its conventional counterpart. Under
the act, the applicable percentage is 50% of the incremental cost plus an additional 30%
if the vehicle meets certain emissions requirements. The maximum credit is based on the
weight of the vehicle, as shown in Table 3. The credit expires at the end of 2010.

⁷ American Council for an Energy-Efficient Economy, Light-Duty Hybrid and Diesel Vehicle Tax
Credits in the Energy Bill. August 2005. [http://www.aceee.org/transportation/hybtaxcred.htm]
Accessed December 15, 2005.

Table 3. Maximum Alternative Fuel Vehicle Tax Credit,
by Gross Vehicle Weight
Up to 8,5008,501 to 14,00014,001 to 26,000More than
poundspoundspounds 26,000 pounds
up to $4,000^aup to $8,000^bup to $20,000^cup to $32,000^d
^Source:^P.L^.^109-^{58, §1341.}
^No^tes:^T^h^{e m}^a^xⁱ^m^u^m^tax^{credit is}^bas^e^{d on}^appli^c^a^b^{le percen}^tag^e^ofⁱⁿ^crem^en^{tal cos}^t^{. T}^h^{e m}^a^xⁱ^m^u^m
^percen^tag^e^ofⁱⁿ^crem^en^{tal cos}^t^is^80%.
^{a. Max}ⁱ^m^u^mⁱⁿ^crem^en^t^a^l^cos^tⁱ^s^$5,000.
^{b. Max}ⁱ^m^u^mⁱⁿ^crem^en^t^a^l^cos^tⁱ^s^$10,000.
^{c. Max}ⁱ^m^u^mⁱⁿ^crem^en^t^a^l^cos^tⁱ^s^$25,000.
^{d. Max}ⁱ^m^u^mⁱⁿ^crem^en^t^a^l^cos^tⁱ^s^$40,000.
To qualify for the credit, the vehicle is required to be a “dedicated” AFV, meaning
that it must not be capable of operating on conventional fuel. This provision is a response
to criticisms of previous AFV policies that included “dual-fuel” vehicles.⁸ In many cases,
dual-fuel vehicles operate solely on gasoline. Because some alternative fuels must be
blended with a small amount of gasoline (e.g., ethanol, methanol), vehicles using these
fuels qualify for a prorated tax credit.
Alternative Fuel Refueling Infrastructure Credit. The Energy Policy Act of
2005 replaces the existing deduction for the installation of alternative fuel infrastructure
with a tax credit. The credit is equal to 30% of the purchase or installation cost of the
refueling property, subject to a maximum dollar amount. For retail property, the
maximum credit is $30,000. For residential property, the maximum is $1,000. The credit
expires after 2014 for hydrogen infrastructure; the credit for all other fuels expires after

2009.

Table 4. Summary of Alternative Fuel and Advanced Technology
Vehicle Tax Incentives Under the Energy Policy Act of 2005
^Ma^xⁱ^m^u^m^M^a^xⁱ^m^u^m^Heavy-^Ma^xⁱ^m^u^m
^Ta^{x Inc}^eⁿ^tⁱ^v^e^Ty^pe^Pas^s^e^{nger Vehicle}^Duty^Vehicle^Iⁿ^fras^tru^c^tu^re^E^x^pⁱ^rati^on^Date
^Credit^Credit^Credit
^H^y^bri^d^v^e^hⁱ^cl^e^$3,400^$15,000ⁿ^/^a^D^{ec. 31, 2009}
^L^ean^-^b^u^rⁿ^v^e^hⁱ^cl^e^$3,400ⁿ^/^aⁿ^/^a^D^{ec. 31, 2010}
^F^u^el^-^cel^l^v^e^hⁱ^cl^e^$12,000^$40,000ⁿ^/^a^D^{ec. 31, 2014}
^A^l^t^e^rn^atⁱ^v^{e f}^u^el^v^e^hⁱ^cl^e^$4,000^$32,000ⁿ^/^a^D^{ec. 31, 2010}
^Resid^eⁿ^{tial r}^e^f^u^elin^g^n/^aⁿ^/^a^$1,000^D^{ec. 31, 2009}^a
ⁱⁿ^f^r^astr^u^c^tu^r^e
^{Retail r}^e^f^u^elin^g^n/^aⁿ^/^a^$30,000^D^{ec. 31, 2009}^a
ⁱⁿ^f^r^astr^u^c^tu^r^e
^Source:^P.L^.^109-^{58, §§1341-}^1342.
^{a. D}^{ec. 31, 2014, f}^o^{r h}^y^drog^enⁱⁿ^f^r^as^t^r^u^c^t^u^re.

⁸ Dual-fuel vehicles can operate using either an alternative fuel or a conventional fuel (e.g.,
gasoline).