CRS Report Examines Alternative Fuel Vehicle Tax Incentives and the CLEAR ACT

Summary

[1] Alternative fuels (non-petroleum fuels such as natural gas and electricity) and advanced technology vehicles face significant market barriers, such as high purchase price and low availability of refueling infrastructure. In current law, there are tax incentives to encourage the purchase of these vehicles and to build new infrastructure to support them. The Clean Efficient Automobiles Resulting from Advanced Car Technologies Act (CLEAR ACT, H.R. 1846 and S. 760) would extend and expand current incentives, and establish new incentives. CLEAR ACT provisions were inserted into both the House and Senate versions of H.R. 4, the comprehensive energy package.

[2] Introduction. Alternative fuel and advanced technology vehicles face significant barriers to wider acceptance as passenger and work vehicles.¹ Often, these vehicles are more expensive than their conventional counterparts. Further, fueling the vehicles is often inconvenient because the number of refueling stations for alternative vehicles is very small compared to the number of gasoline stations nationwide. However, many of these vehicles have superior efficiency and/or environmental performance compared to conventional vehicles. Thus, there has been significant interest in promoting these vehicles as a response to environmental and energy security concerns.

[3] Currently, there are individual and business tax incentives for the purchase of alternative fuel and advanced technology vehicles and for the installation of alternative fuel infrastructure. There are also federal and state fleet purchase requirements for alternative fuel vehicles. In the 1071 Congress, H.R. 1846 and S. 760, the Clean Efficient Automobiles Resulting from Advanced Car Technologies Act (CLEAR ACT), would expand the existing tax incentives. Because of recent concerns over energy dependence and high energy costs, language from the CLEAR ACT was inserted into the House and Senate versions of H.R. 4, the comprehensive energy policy package.² On June 28, 2002, the Conference Committee convened to reconcile the two versions. As of this writing, the final version has not been reported.

[4] This report discusses current federal tax incentives for alternative fuel and advanced technology vehicles. It also outlines changes to those incentives that would result from enactment of the CLEAR ACT. Finally, because of concerns over potential similarities to a failed state program, the CLEAR ACT and that state program are compared.

[5] Existing Tax Incentives. Currently, there are two federal tax incentive programs for the purchase of non-conventional vehicles. These are the Electric Vehicle (EV) Tax Credit, and the Clean Fuel Vehicle tax deduction. There is also a deduction for the installation of alternative fuel infrastructure.

[6] Electric Vehicle Tax Credit. For 2002, there is a federal tax credit worth 7.5% of the purchase price of an electric vehicle, up to a maximum of $4,000.³ The percentage is reduced by 25% each year in 2003 and 2004, and is fully phased out in 2005. The credit must be taken in the year the vehicle is purchased.

[7] Clean Fuel Vehicle Tax Deduction. For the purchase of alternative fuel vehicles, as well as hybrid electric vehicles, there is a Clean Fuel Vehicle Tax Deduction.⁴ 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; 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 credit will be phased out after 2004. Until recently, 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 hybrids.⁵

[8] Fueling Infrastructure Tax Deduction. Businesses that install alternative fuel refueling infrastructure can claim a tax deduction of up to $100,000.⁶ This deduction expires at the end of 2004.

[9] The CLEAR ACT. The CLEAR ACT would expand and extend the existing tax incentives for non-conventional vehicles. Two versions of the bill were introduced and referred to the House Ways and Means and Senate Finance Committees, respectively. During consideration of comprehensive energy legislation, most of the provisions of the CLEAR ACT were inserted into both the House and Senate versions of H.R. 4. H.R. 4 was approved by the House on August 2, 2001 and by the Senate on April 25, 2002.

[10] The CLEAR ACT contains the following key provisions:

• create a new tax credit for the purchase of fuel cell vehicles;

• expand and extend the existing electric vehicle (EV) purchase tax credit;

• replace the existing clean fuel vehicle tax deduction with an alternative fuel vehicle tax credit;

• create a new tax credit for the purchase of hybrid electric vehicles;

• create a new tax credit for the purchase of lean-bum vehicles;

• extend the tax deduction for the installation of refueling infrastructure;

• and create a new tax credit for the retail sale of alternative fuel.

[12] Fuel Cell Vehicle Purchase Tax Credit. All three versions of the CLEAR ACT would provide a tax credit for the purchase of a fuel cell vehicle. The credit increases with the gross vehicle weight (GVW) of the vehicle, 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. These values are identical for all three versions of the bill.

[14] In addition to the above credit, low-speed ⁷ EVs would qualify for a credit equal to 10% of the purchase price up to a maximum of $4,000 (under the Senate version, the maximum credit would be $1,500).

[17] Hybrid Electric Vehicle Tax Credit. Under all three versions, the existing clean fuel vehicle deduction for hybrid electric vehicles would be replaced with a tax credit. The amount of the credit is based on several factors. For passenger vehicles, these factors include the percentage of power provided by the electrical components in the hybrid system, any fuel economy improvements over conventional vehicles, and (in the House version of H.R. 4) projected fuel savings. For heavy-duty vehicles (over 8,500 pounds), the factors are the power supplied by the electrical system, and the emissions performance of the vehicle. In the case of heavy-duty vehicles, the extra credit for emissions performance is phased out between 2002 and 2006. The range of potential credits for each vehicle weight are shown in table 4.

[19] Alternative Fuel Refueling Infrastructure. The House version of H.R. 4 would extend the existing deduction for the installation of refueling infrastructure through the end of 2007. The CLEAR ACT, as introduced, and the Senate version of H.R. 4 would replace the existing deduction with a tax credit. The credit would be equal to 50% of the purchase or installation cost of the refueling property, subject to a maximum dollar amount. In the case of retail property, the maximum credit is $30,000. For residential property, the maximum would be $1,000. The credit would expire at the end of 2011.

[20] Alternative Fuel Sales Credit. In addition to the above credits, the CLEAR ACT, as introduced, and the Senate version of H.R. 4 would provide a credit for the retail sale of alternative fuel. There is no similar provision in the House version of H.R. 4.

[21] Under the Act as introduced, the credit would equal 50 cents per gasoline equivalent gallon (GEG) ⁹ of alternative fuel sold. To qualify for the credit, the retailer would be required to reduce the retail price of the fuel by 50 cents per GEG. The credit would expire after 2007. The Senate version of H.R. 4 would provide a credit of 30 cents per GEG in 2002, increasing to 50 cents per gallon in 2006. However, in the Senate bill the retailer is not required to pass the savings on to the customer. The credit would expire after 2006.

[22] The CLEAR ACT and Arizona SB 1504. In April 2000, the state of Arizona enacted SB 1504, which provided extensive state tax credits for the purchase of alternative fuel vehicles. By December 2000, the state had repealed the program after projected costs had increased from approximately $10 million to approximately $200 million.¹⁰ The failure of the program hinged on two key points.

[23] First, more vehicles were eligible for the credits than originally projected. Because certain after-market alternative fuel conversions were found to increase emissions beyond legal levels, EPA ordered that conversion kit manufacturers use more stringent (and more expensive) testing procedures after model year 1999. To increase the availability of AFVs for Arizona's program, members of the Arizona State Legislature successfully lobbied EPA to delay the new testing procedures until model year 2002.¹¹ This made significantly more low-cost AFV conversions eligible for the credit. Further, with these conversions the vehicles were still capable of using conventional fuel.

[24] Second, SB 1504 provided a credit of between 30% and 50% of the entire purchase price of the vehicle, as well as an additional credit for the incremental cost or conversion cost for the AFV system. The law stipulated no maximum credit. Therefore, some consumers were encouraged to purchase expensive vehicles and install AFV conversions, and spend less money overall than if they had not converted the vehicle.

[25] While the CLEAR ACT does not guarantee a low cost impact on Department of Treasury revenue, it is unlikely that it would lead to a situation similar to Arizona's. First, the widely exploited conversions available to Arizona's taxpayers are no longer certified by EPA. Further, the credits under the CLEAR ACT only apply to dedicated AFVs. Next, the CLEAR ACT sets maximum tax credits, with a base that is fare[sic] more modest than Arizona's. Further, for AFVs it only covers the incremental cost of the system.

² For a detailed analysis of H.R. 4, see CRS Report RL31427, Omnibus Energy Legislation.

³ 26 U.S.C. 30

⁴ 26 U.S.C. 179A

⁵ Further, taxpayers who purchased hybrids in previous years may file an amended return to claim the deduction.

⁶ 26 U.S.C. 179A

⁷ A low-speed vehicle is one which is street-legal, but only on roads with a posted speed limit of 35 miles per hour or less.

⁸ A dual fuel vehicle is one capable of operating using either an alternative fuel or a conventional fuel, such as gasoline.

⁹ Because fuels vary in energy content, an amount of fuel with equivalent energy of one gallon of gasoline is used for comparison.

¹⁰ 'Melissa Morrison, "Arizona's Alternative Fuel Incentives Backfire," The Washington Post. December 11, 2000. p. A3.

¹¹ Letter from Steven A. Herman, U.S. EPA to Jeff Groscost, Speaker of the House, Arizona House of Representatives. May 16, 2000.