Tax Incentives – Law Street

The Tax Credit Battle Over Environmentally Friendly Cars

Joseph Palmisano — Tue, 09 Sep 2014 14:00:43 +0000

Image courtesy of [Keith Fahlgren via Flickr]

In a world where the price of gas is costly for both our wallets and the environment, environmentally friendly cars are becoming increasingly popular. In fact, the United States government is encouraging the purchase and use of environmentally friendly cars by offering tax credits. Read on to learn about the environmental car trend, tax credits offered, and their effects.

What are environmentally friendly cars?

Environmentally friendly cars, sometimes referred to as “green” cars, are essentially cars that minimize their harmful effects on the environment. They can include, but are not limited to:

Hybrid cars: While these cars can take many forms, this category of eco-friendly cars include any type of car that uses multiple energy sources to power a vehicle. The most common type is a hybrid-electric vehicle.
Bio-diesel cars: These cars are powered by diesel, or a mix of diesel and vegetable oil.
Ethanol-powered cars: This category of eco-friendly cars use ethanol created from a material such as corn, barley, or wheat.
Electric cars: These cars run on electricity and are plugged in to gain enough charge to function.
Hydrogen-powered cars: These vehicles use hydrogen for power, in the form of fuel cells. Many versions of hydrogen cars are still in the development processes.

Eco-friendly vehicles make up a relatively small number of the vehicles sold in the United States, but the market is growing. JD Power and Associates has estimated that by 2015 eco-friendly cars that contain some sort of hybrid component could make up as much as 10 percent of the vehicle market share.

What tax credits can you obtain for using an environmentally friendly car?

The Energy Policy Act of 2005 established a series of tax incentives, namely credits, for individuals purchasing or leasing eco-friendly vehicles such as electric cars, hybrids, and alternative-fuel vehicles. This bill was expanded upon by the Energy Independence and Security Act of 2007. Because of the added cost of their fuel-efficient technologies as well as their lack of presence in the current auto market, eco-friendly cars are significantly more expensive than similar cars with engines run on gasoline. These federal tax incentives were aimed at increasing the sales of these “green” cars to make them a larger part of the transportation vehicle market and thus reduce harmful carbon emissions in the United States into the environment.

Currently, individuals purchasing electric cars and plug-in hybrids can qualify for a tax credit of up to $7,500 dollars, which in some cases can significantly reduce the cost of these cars. These incentives are designed to gradually phase out for a given manufacturer after that company has sold more than 60,000 electric cars. Individual states also have their own incentives for purchasing “green” cars. Since their introduction into the car market, there has been debate as to whether these incentives are effective reaching their goals or whether they should even be offered in the first place.

What is the argument for creating these tax credits?

Supporters of these incentives argue that tax credits will increase sales of this type of car and help establish eco-friendly car brands such as Tesla or the Nissan Leaf as economically viable options for consumers. When the federal and state tax incentives are combined with the increased fuel economy, they often become just as cheap, if not cheaper, than standard gasoline-combustion cars. Leases are popular for these relatively-new cars, and in many states such as Washington and Georgia, where state tax incentives for eco-friendly cars are high, individuals are able to lease these cars nearly for free.

Supporters assert that these tax incentives allow fledgling hybrid manufacturers to gain an economic foothold and to become serious competitors in the auto market. Through increased sales due to federal tax incentives, Nissan was able to open lithium ion battery factories in Tennessee to cut down on cars being shipped from Japan, allowing them to drop the price of the Nissan Leaf by $6,400. Price reductions such as this will lead to increased sales and company growth, allowing hybrid manufacturers to gain a larger share of the profit from auto sales. Altogether, as hybrid manufacturers grow and as more people purchase and lease hybrid and electric cars, US emissions will be dramatically reduced.

What is the argument against creating the tax credits?

Opponents of these tax incentives argue that the tax credits do not make these environmentally-friendly cars more cost effective; they do not help reduce emissions; and they only make “green” cars more affordable to already-wealthy individuals while requiring taxpayers and the federal government to foot the bill.

The federal government imposes standards on the average fuel economy of all vehicles each company sells, and mandates that a company cannot exceed this limit. By selling more hybrid cars, car companies are in fact able to sell more low-fuel economy cars while still adhering to these federal standards, thus negating the tax incentives’ effect on improving the environment. And while tax incentives in some states may make eco-friendly cars cheaper to lease, some studies indicate that even with the tax incentives cars such as the Chevy Volt could still take up to 27 years to pay off.

The Congressional Budget Office stated in a 2012 report that it would require tax incentives of about $12,000 — $4,500 higher than current incentives — to have a serious impact upon the price of hybrid and electric cars. According to these reports, hybrid and electric cars still are not affordable to the average consumer. Opponents then argue that the tax incentives only serve to make these eco-friendly cars more affordable for affluent families who can already afford them. Meanwhile, the federal government and taxpayers are forced to cover the money lost by these incentives. The Congressional Budget Office report estimated these incentives would cost the federal government roughly $7.5 billion through 2019.

There’s also some concern about whether or not hybrids are actually good for the environment, as depicted in the infographic below.

Conclusion

Environmentally friendly cars are certainly here to stay, and while their market share increases the government has been happy to encourage it. However, as they become more prevalent among the average driver, the government may not have the resources to continue with the tax credits. For now, it’s a innovative program that could be a good choice for those in the market for a new car.

Resources

Primary

State of Utah: Clean Fuel Vehicle Tax Credit

U.S. Congress: Energy Policy Act of 2005

Additional

Wall Street Journal: To Spark Buyers for Electric Cars, Drop the Price to Nearly $0

Street: Why Electric Cars Are Selling in California: They’re Free

Palisades Hudson Financial Group: Atlanta Turns Over a New Leaf

Seattle Times: Seen a Tesla Today? Electric Cars Turn Up Fastest in Washington State

The New York Times: Payoff For Efficient Cars Takes Years

Fortune: Electric Vehicles Still Struggling to be Cost-Competitive

American Enterprise Institute: Subsidy-Powered Vehicles

Forbes: If Tesla Would Stop Selling Cars, We’d All Save Some Money

Congressional Budget Office: Effects of Federal Tax Credits for the Purchase of Electric Vehicles

Bankrate.com: Tax Breaks For Gas Savers

Green Car Reports: Will Georgia Kill Its $5,000 Tax Credit For Electric-Car Purchases

San Francisco Gate: Car Fuel Efficiency Tax Breaks

Internal Revenue Service: Going Green May Reduce Your Taxes

Joseph Palmisano

Joseph Palmisano is a graduate of The College of New Jersey with a degree in History and Education. He has a background in historical preservation, public education, freelance writing, and business. While currently employed as an insurance underwriter, he maintains an interest in environmental and educational reform. Contact Joseph at staff@LawStreetMedia.com.

The post The Tax Credit Battle Over Environmentally Friendly Cars appeared first on Law Street.

Max Baucus’ Tax Plan: Could it Work?

Joseph Palmisano — Wed, 19 Mar 2014 15:22:57 +0000

Image courtesy of [Center for American Progress via Flickr]

On December 18, 2013, Senate Finance Committee Chairman Max Baucus unveiled a discussion draft for an energy tax reform plan intended to make progress in the federal government’s current system of corporate tax incentives for the production of clean energy. The old system was criticized as being too complicated and too decentralized. Read on to learn about Baucus’ energy plan, the arguments in favor of it, and the arguments against it.

What was Baucus’ plan?

There are forty separate tax incentives offered to corporations for a variety of forms of energy including fossil fuels, wind, solar, and nuclear power; however, many of these are short-term incentives set to expire every two years or so until they are re-authorized by Congress, often leaving companies unsure of which tax incentives would still be in effect in the future. These incentives are also often specific in a way that does not provide for new and emerging technologies that may contribute to reducing emissions.

Senator Baucus’ plan aims to make energy tax incentives “more predictable, rational, and tech-neutral” by consolidating some of these incentives and eliminating others to form two broader and simpler tax incentives, one focused on clean production of electricity and one focused on clean production of transportation fuel. These incentives are granted after a particular plant is using a method that produces emissions intensity 25 percent cleaner than average energy production methods (“emissions intensity” is measured as the amount of emissions released per amount of energy produced, and is used to compare the environmental effect of different methods of energy production).

Baucus’ plan also calls for using the federal money saved through this tax reform to lower the corporate tax rate, which currently stands at 35 percent. Baucus, however, was confirmed in January as the next US Ambassador to China, and though leadership of the Senate Finance Commission will transfer to Senator Ron Wyden, who has worked closely with Baucus on this reform plan, many expect the plan to become stalled as its leader moves overseas. Despite this uncertain future, Baucus’ reform plan is seen as an indicator of impending reform to the current energy tax system in the United States.

What is the argument for Baucus’ plan?

Supporters of the reform say Baucus’ plan is an effective way to simplify the tax incentive structure while supporting clean energy. Companies would not have to waiting on their toes to see whether the particular incentives that apply to them would be renewed, and knowing that these incentives will have more longevity would promote more investment into clean energy production technology projects in the future. Most importantly, this reform plan is tech-neutral, meaning that it does not favor certain technologies over others and in fact does not specify any technologies in its incentives.

Supporters argue that this aspect of the plan will benefit newer and cleaner technologies that may not necessarily fit into the rigid outlines of our current tax incentives, thus paving the way for further innovation and investment into energy-producing technology. Additionally, many of the incentives that are to be eliminated and not included in the broader transportation fuel incentive are tax breaks that benefit Big Oil, a move hailed by many supporters who do not see the point of offering tax breaks to companies in an industry that has shown record profits year after year [cite]. Lastly, with the federal revenue gained from simplifying the tax incentive structure and removing breaks for big oil companies, Senator Baucus’ plan intends to lower corporate tax rates, which supporters hope will provide impetus for further economic growth.

What is the argument against Baucus’ plan?

Others are strongly opposed to this reform plan due to its emphasis only on energy producers (companies that use coal, fossil fuels, wind, solar and other methods to produce energy) and not energy users (all other private citizens and companies that use electricity, gasoline, etc.), and because the emissions reduction quotas of the incentives are, as one critic put it, “unambitious”, and would have little effect on improving the environment.

The two main tax incentives of Baucus’ plan target producers of electricity and transportation fuel, with no mention of companies that use energy in a cleaner way. This means that companies that make their buildings more energy efficient, companies that manufacture environmentally-friendly appliances and cars, and the individuals who use these greener manufactured goods would no longer receive the tax incentives they currently receive. Many opponents see this as being counter-productive in the struggle to promote cleaner energy technologies.

And while this plan does target energy production, many opponents point out that this plan would actually reduce incentives provided to areas such as solar and wind power. Whereas currently producers of solar power receive an investment tax credit of 30 percent, under this new plan they would only be entitled to either a production tax credit of $0.023 per kilowatt or an investment tax credit of 20 percent. Therefore, despite favoring carbon-free methods of energy production, many opponents feel this plan will do little to help area such as solar, wind, and other green energy production.

There has also been a backlash from the oil and natural gas industry, as well as from areas such as Montana and North Dakota who have a fledgling oil industry, arguing that by favoring carbon-free technologies the plan would be stifling job opportunities and economic growth brought about by the oil industry. Lastly, some opponents of the plan argue that the reduction quotas are too low. One critic points out that a 25% reduction in emissions “intensity”, which is the wording used in the discussion draft, is vastly different from a concrete measurement of emissions, and depending upon economic growth and the relative amount of energy these companies are producing, companies could meet this quota without any serious reduction in emissions. On a broader scale, some oppose tax incentives for alternative energy production altogether, arguing that global warming is, as indicated by its name, a global phenomenon, and that any reduction in emissions in the US is offset by emissions due to economic growth in developing countries, where environmental legislation is often more lax.

Conclusion

It’s clear that something needs to be done to fix the very confusing and red-tape-littered energy tax process. While there are certainly tangible benefits to Baucus’ plan, opponents worry that it would do more harm than good.