Fed Tax Break Encourages SUV Purchases

Oct. 1, 2003 — -- Thanks to a generous tax credit, Karl Wizinsky is driving a very large vehicle these days — a 2002 Ford Excursion.

"It doesn't hurt to have a larger vehicle, but I wouldn't say it's a requirement of my business," he said on a cell phone while driving the Excursion. "But I ended up saving $32,000."

This year, the perks of buying a large SUV — if you're a small business owner — got even bigger.

Congress recently passed a tax bill, as proposed in President Bush's economic stimulus plan, that offers a $100,000 tax credit for business owners who purchase any vehicle weighing 6,000 pounds or more when fully loaded.

When Wizinsky's accountant told him about the credit last year, the amount was much less, at $75,000, but it was enough to encourage Wizinsky to trade in his Mercury Marquis for the Excursion.

"It sounded too good to be true," said Wizinsky, a health care consultant in Novi, Mich. "But it was true. So I bought the SUV. For a small company like mine it's a significant credit."

Hybrid Earns Smaller Break

Meanwhile, legislation that offers a much smaller tax break — a $2,000 tax deduction — to those who purchase fuel-efficient hybrid cars is on track to be phased out. Congress is considering legislation that would extend the tax deduction to encourage consumers to buy the hybrid cars, but the status of the bill remains uncertain.

Even though the large vehicle tax credit applies only to the self-employed while the hybrid car tax deduction applies to anyone who buys a hybrid, the stark contrast between the two amounts has environmentalists crying foul.

"You can't fault people for taking advantage of the credit if they're using the vehicles for business — it's a rational choice," said David Friedman, a senior analyst with the Union of Concerned Scientists. "But why should taxpayers' dollars go toward buying bigger and bigger vehicles? Instead, the government should be encouraging people and small business owners to buy fuel-efficient cars."

Large SUVs average anywhere from 9 to 15 miles per gallon, while hybrid cars offered by Toyota and Honda can average up to 50 or 60 miles per gallon. American drivers now burn some 9 million barrels of oil a day in their cars and trucks. That's expected to grow to 12 million barrels a day by 2010 if fuel economy does not improve, according to the U.S. government.

SUV Measure Was Meant for Small Businesses

Friedman is also concerned that many of the self-employed using the tax credit don't actually need the large vehicles for their business but, like Wizinsky, are enticed by the hefty financial return. He says some SUV and Hummer dealerships have been touting the credit to increase sales.

The tax credit for large vehicles was originally created in the mid-1980s to help farmers and small business owners purchase trucks and other large vehicles needed for hauling. The measure is designed to support and encourage small business, which, in turn, can improve the economy.

But anyone who is self-employed can apply for the credit and any vehicle weighing more than 6,000 pounds, including large SUVs and Hummers, which get 8 to 13 miles per gallon, can qualify. Originally the amount was much less — at $17,500. As the tax credit limit has increased, so have the number of claims.

According to the Washington watchdog group, Taxpayers for Common Sense, about 100,000 owners of 3.6 million large SUVs sold last year claimed the credit.

Hybrid Deduction Set to Fade

While environmentalists argue the government should do more to encourage people to buy more efficient cars, Eron Shosteck of the Alliance for Automobile Manufacturers in Washington, D.C., says the vehicle tax credit for small businesses simply needs to be expanded.

"Anyone who uses a vehicle to conduct their business should be able to get a tax credit," he said. "Right now the law discriminates against people who only need smaller cars. It distorts the marketplace."

Meanwhile, the $2,000 deduction for hybrid owners, set up as an extension of a 1992 law designed to encourage drivers to buy electric-powered cars, is set to fade. The full deduction for hybrids is allowed through 2003 and is reduced 25 percent a year until it is phased out.

There is White House support to revive the measure. The Bush administration has said it favors a provision that would allow $3 billion in tax credits for hybrid and hydrogen fuel cell vehicles over 11 years. But the measure's status remains uncertain. A Senate committee passed a bill in April that would extend tax breaks for hybrid cars, but the House committee's version of the bill eliminated the credits.

Even if the $2,000 tax break for hybrids is extended, its impact may be limited. Hybrid cars sell for about $5,000 more than their strictly gas-powered counterparts. And unlike the large vehicle credit, which can in some cases cover the entire cost of a large SUV for small business owners, the hybrid car deduction does not cover the extra cost of buying hybrid technology.

The deduction wasn't enough, for example, to convince Matt Rheingold, a realtor in Boulder, Colo., to buy a hybrid this year, although he was considering the option.

"I'm definitely interested because I figure if people can do something simple to help the environment, then why not?" said Rheingold, who uses his car to escort clients to property locations. "But I'm going to wait until they integrate hybrids into nicer models."

Changes Ahead?

Senator Barbara Boxer, D-Calif., has introduced a bill in the Senate that would exclude SUVs from the list of vehicles people could write off using the $100,000 small business tax credit. A similar bill was introduced in the House in February and both are pending.

In the meantime, other, statewide provisions are proving effective in boosting hybrid car sales. Some states have their own state tax deductions for the cars and Virginia and Hawaii have introduced measures that permit single drivers who operate a hybrid or super-low-emission vehicle to use lanes normally limited to carpools.

Todd Ketch, a commuter in Woodbridge, Va., wrote recently in the Washington Post that purchasing his Honda Civic Hybrid "truly changed my life," thanks to carpool lane law.

"Now … if I leave my office by 5:15 p.m., I can be in my driveway by 6 p.m.," he wrote. "I see my kids a lot more these days."