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Tax Credits for Hybrid Vehicles

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Publication Date: December 2006

Publisher(s): Library of Congress. Congressional Research Service

Series: RS22558

Topic: Energy (Fuels)
Manufacturing and industry (Automotive industry)


Hybrid vehicles are propelled by a standard gasoline (or diesel) internal combustion engine in combination with an electric motor (and battery storage system), which improves fuel economy. The Energy Policy Act of 2005 replaced a $2,000 deduction for hybrids with a system of tax credits that vary according to fuel efficiency and estimated lifetime fuel savings, compared with a 2002 comparable gasoline-only model. These credits, which range from $250 to $3,400 per vehicle, went into effect on January 1, 2006, and are available through December 31, 2009. However, there is an approximately 60,000-per-manufacturer limit on the number of hybrid vehicles that would qualify for the full credit. Toyota reached its limit in the second quarter of 2006, and the credits for those vehicles are being phased out and will not be available after October 1, 2007. Honda is projected to reach its limit sometime in 2007. U.S. manufacturers (primarily General Motors and Ford) produce mostly SUV hybrids, which have seen slower demand. The tax credits for hybrids were enacted to promote energy conservation in the transportation sector by encouraging the demand for fuel-efficient alternative-technology vehicles. The 60,000-vehicle limit was imposed to limit the benefits accruing to foreign hybrid manufacturers, which currently dominate the hybrid market.