Income Tax Credits for Alternative Fuel Vehicles

Background on Alternatively Fueled Vehicles
The personally owned automobile is a dominant fixture in America's landscape.  Despite its popularity as the preferred travel mode, growing environmental, social and foreign oil dependency concerns over the automobiles' reliance on the internal combustion engine (ICE) has led to a push for greener engine platforms.  One platform, the hybrid electric vehicle (HEV), has become popular in the U.S. auto market over the past decade.

Another, the plug-in electric vehicle (PHEV), has recently debuted as the next eco-friendly auto innovation.  Although HEVs and PHEVs are among the most well known alternative fuel platforms, others such as hydrogen and natural gas propulsion vehicles are emerging.  

Overview of government incentives
In order to encourage sales, the federal government used a variety of income tax incentives to subsidize the higher price of alternative fuel vehicles.  At first, the government utilized federal income tax deductions to promote new vehicle sales.  However, the deduction would soon be converted into a tax credit under the Energy Policy Act of 2005.  Additionally, many states and local governments supplemented the federal tax incentives with their own programs.  Combined, these benefits were highly correlated with increasing HEV sales in America. The graph below highlights the diversity of these programs:

With the recent debut of commercial PHEVs in the U.S., the federal government has implemented a Plug-In Electric Drive Vehicle Credit worth up to $7,500.  Similarly, some states have followed suit to encourage sales.  The state of West Virginia's Alternative Fuel Vehicle (AFV) credit is the highest in the nation.

West Virginia's AFV credit
West Virginia's AFV credit has a storied history that began with the large-scale production of HEVs in America.  However, near the height of those sales, the AFV credit would expire in 2006.  Yet, political will would bring the credit back to life and expand its eligibility to a plethora of alternative fuel vehicle types.  According to SB 465:

• The credit is available to eligible taxpayers that convert a vehicle to operate exclusively on an alternative fuel or purchased new original equipment manufacturer dedicated or bi-fuel AFV
• Includes natural gas, E85, propane, electricity, hydrogen, and coal-derived liquid fuels.
• PHEVs are also eligible.
• For vehicles under 26,000 pounds:
• 35 percent against purchase price to a maximum of $7,500
• 50 percent against conversion costs to a maximum of $7,500

Implications of AFV credit

Dr. Zhao's presentation on transportation finance highlighted the funding shortfalls associated with the Highway Trust Fund (HTF).  Some researchers suggest that the political push towards more fuel efficient vehicles will only increase revenue loss and put the nation's ability to maintain its current infrastructure at risk.  

With these consequences in mind, one can posit that taxpayers are essentially subsidizing the demise of their own transportation infrastructure through the use of income tax credits.

A couple of questions to consider:

• How can U.S. environmental and transportation policy progress forward without bankrupting the HTF?
• Are federal and state income tax credits equitable considering the high sticker price of alternatively fueled vehicles?  Who can benefit from these credits?  Who can't?  What can be done to level the playing field?