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

Publication Date: March 2005

Publisher: Library of Congress. Congressional Research Service

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Research Area: Transportation

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Abstract:

The growing presence of large sport utility vehicles (SUVs) on U.S. streets, roads, and highways since the early 1990s has fueled a lively debate over what steps the federal government should take, if any, to alter their effects on the environment, highway safety, traffic congestion, and overall gasoline consumption.

Legislative activity in the 108th Congress enlarged the scope of the debate to include the effect of federal tax policy on the demand for heavy-duty SUVs. In passing the Jobs and Growth Tax Relief Reconciliation Act of 2003, Congress raised the maximum expensing allowance under Section 179 of the Internal Revenue Code from $25,000 to $100,000. Heavy-duty SUVs purchased mainly for business use qualified for this allowance. Critics of SUV and their allies in Congress took exception to making large SUVs eligible for the enhanced allowance on the grounds that doing so would encourage their purchase by lowering their after-tax cost relative to smaller, more fuel-efficient vehicles. In an apparent response to this concern, the 108th Congress added a provision to the final tax bill it passed -- the American Jobs Creation Act of 2004 (AJCA) -- lowering the maximum expensing allowance for SUVs weighing between 6,000 and 14,000 pounds and placed in service after October 22, 2004 from $100,000 to $25,000. While it is substantial, the reduction appears to have done little to curtail the effective tax preference for large SUVs arising from the tax treatment of depreciation.

One important way in which the federal tax code can influence the purchase of heavy-duty SUVs for business use is through important differences in the tax treatment of depreciation for these vehicles and passenger cars. 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 allowable depreciation deductions. 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. As a result, a business taxpayer can realize a greater total depreciation allowance (measured in constant dollars) over a vehicle's useful life by purchasing a heavy-duty SUV than a passenger car of comparable value.

The federal tax code also influences 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 that have relatively poor fuel economy ratings. It is paid by manufacturers and importers. Automobiles are defined as motor vehicles weighing 6,000 pounds and less. Vehicles with a gross weight above that limit are exempt from the tax.

There are no current legislative initiatives in the 109th Congress to modify these tax preferences for heavy-duty SUVs. The report will be updated to reflect significant legislative activity addressing them.