Overview
The near simultaneous passage of the Energy Policy Act of 2005 (H.R. 6)
and the SAFE Transportation Equity Act of 2005 (H.R. 3) tends to highlight
the interrelationship of the two major areas of energy and transportation
to the American economy. A major portion of energy usage goes to support
transportation in its various forms and the taxation of energy resources
serves as a major source of funding to build and maintain the transportation
infrastructure.
It is expected that neither piece of legislation will have much, if any,
immediate impact on the price consumers pay for gasoline. However, the
tax title (Energy Tax Incentives Act, Title XIII of H.R. 6), does contain
numerous benefits directed at traditional energy producers, such as the
oil, coal, and electric power industries. In addition, the sometimes forgotten
nuclear power industry also received attention from Congress. Finally,
nontraditional sources of energy, including biodiesel and solar power,
were also considered.
Although these legislative efforts were aimed primarily at the energy
and transportation industries, that is not to say that individuals or
general business should feel left out. In particular, car purchasers,
homeowners, and commercial building owners will all have something to
consider when doing their tax planning. In addition, the legislation contains
the typical smattering of specialized provisions benefitting such diverse
groups as small custom gunsmiths, sport fishermen, and certain segments
of the alcoholic beverage industry.
Overall Effect on Individuals
Individual taxpayers were the recipients of two significant changes made
by the Energy Tax Incentives Act of 2005 (Energy Act). First, prospective
car and light truck purchasers will have new incentives to purchase a
vehicle powered by other than a traditional gasoline engine. Due to certain
restrictions contained in the statute, anyone contemplating such a purchase
in the near future should study their options and consider the benefits
of deciding sooner rather than later.
Another major class of beneficiaries of the Energy Act are homeowners.
New incentives for energy-efficient changes to one's home, including the
installation of certain solar or photovoltaic equipment should prove popular.
In addition, a new credit is available for the installation of equipment
to be used to refuel certain nontraditional vehicles.
Effect on Purchasers of Environmentally Friendly
Vehicles
New credits on purchase or lease. --The Energy Tax Incentives Act of 2005
(Energy Act) did not neglect a growing segment of the American driving
public consisting of purchasers of vehicles that are powered by other
than a traditional gasoline engine. Such vehicles, which include pure
electrics and hybrids, as well as those that run on natural gas, liquefied
petroleum or natural gas, or 85-percent methanol have been growing in
popularity as gasoline prices have risen. Hybrid cars, such as the Toyota
Prius and Honda Insight, as well as more recent luxury entries like the
Lexus RX 400h, have been garnering the bulk of the publicity. Particularly
in the case of hybrids, price does not seem to have deterred sales, at
least not to date. However, the typical hybrid model "stickers"
for several thousand dollars more than its normally powered sibling. Over
time, consumers may find it hard to justify such a price differential
even when that initial price is offset by fuel savings over the life of
the vehicle. For example, if the hybrid version of a vehicle averages
40 miles per gallon versus 25 for the gasoline version and, assuming gasoline
averages $2.50 per gallon, a driver would have to travel over 80,000 miles
to recover a $3,000 difference in price between the two vehicles. Of course,
this is before the consideration of tax incentives that can drastically
alter that equation.
The Energy Act effectively terminates the current law deduction for clean
fuel vehicles and replaces it with a series of credits for hybrids, lean-burn
vehicles, fuel cell vehicles, and alternative fuel vehicles under the
overall title of the "Alternative Motor Vehicle Credit".
Hybrids and lean-burn vehicles. --Although prior law did provide tax incentives
for the purchase of a hybrid or other nontraditional vehicle, the Energy
Act sweetens the deal. Beginning January 1, 2006, purchasers and lessors
of hybrids and so-called lean-burn vehicles are entitled to a two-part
credit rather the deduction that had been in place before the new law.
The two part credit consists of (1) a fuel economy credit and (2) conservation
credit. The fuel economy credit is computed on the basis of a comparison
with 2002 model year fuel economy for city driving. This portion of the
credit ranges from $400 for a vehicle with fuel economy that is at least
125 percent better than the base amount and up to $2,400 for one that
has fuel economy of at least 250 percent of the base amount. For example,
a 2002 passenger car in the 3,500 pound class had a fuel economy rating
of 22.6 miles per gallon. Accordingly, a hybrid vehicle that produces
fuel economy of double that amount would be entitled to a $1,600 fuel
economy credit under the new law. The conservation credit relates to the
lifetime fuel savings of a vehicle and ranges from $250 for a savings
of at least 1,200 gallons of gasoline to $1,000 for a savings of at least
3,000 gallons. A similar credit is available for commercial vehicles as
well.
However, what Congress gives with one hand it often takes away with the
other. The new credit for hybrid and lean-burn vehicles will be capped
once a manufacturer sells 60,000 of such vehicles. Beginning with the
second quarter after the 60,000th sale is recorded, purchasers would only
be entitled to a reduced credit phasing down to no credit after the fifth
quarter. Although the basic reason for such a cap may be the cost to the
federal treasury, there has been some speculation that it was also included
to give domestic auto manufacturers a needed break against some of their
Japanese rivals that have been out front with this technology and are
already selling enough such cars annually to easily exceed the cap limitations
next year. The credit is set to expire generally December 31, 2010.
Alternative fuel vehicles. --Somewhat less sexy from a technological point
of view than hybrids, alternative fuel vehicles are still an important
segment of the current automotive market. Alternative fuels include natural
gas, liquefied petroleum or natural gas, or 85-percent methanol. The Department
of Energy lists over 20 models of 2005 cars and light trucks that are
available as alternative fuel vehicles that are not hybrids. These include
such mainstream models as the Ford Taurus, Dodge Ram pick up, and the
Chevy Silverado. For alternative fuel cars and light trucks, the Energy
Act provides a credit of up to $4,000. A larger credit is available for
trucks, buses, and vans. This credit also expires December 31, 2010.
Fuel cell vehicles. --Although fuel cell vehicles are extremely rare today,
President Bush in his 2003 State of the Union address stated his interest
in American industry developing viable hydrogen powered cars and trucks
within the near future. The result is the President's Hydrogen Fuel Initiative,
which, in conjunction with the FreedonCAR partnership with automakers,
is intended to advance high-technology research needed to produce a practical,
affordable hydrogen fuel cell that can significantly improve fuel economy
over time. The drafters of the Energy Act did not forget to consider the
potential future importance of fuel cell vehicles. Accordingly, a two-part
credit is also provided for these vehicles with part one based on the
vehicle's weight class and the second part based on fuel economy as compared
to the 2002 model year figures. The base credit can run as high as $8,000
for cars, but tops at $4,000 in 2010 and later. The additional credit
runs from $1,000 for vehicles having 150 percent better fuel economy than
2002 to $4,000 for those with 300 percent better fuel economy. The fuel
cell credit would expire December 31, 2014.
Unfortunately, not all alternative vehicles received
a boost from the Energy Act. A provision that would have extended the
credit for electric vehicles was dropped in the Conference Agreement.
Residential clean-fuel refueling equipment. --If you own a vehicle that
is powered by something other than gasoline, a serious practical problem
may be how to refuel your vehicle. At the present time, it is not possible
to simply drive down to the local service station and fill up your tank
with 20 gallons of natural gas or to recharge your electric car. In answer
to this point, beginning in 2006 for property placed in service in 2006,
the Energy Act allows a new credit of up to $1,000 for the residential
installation of alternative fuel vehicle refueling property. Such property
would include storage tanks and dispensing units and charging stations
for electric cars. Alternative fuels for purposes of this credit include
mixtures that are at least 85-percent ethanol, natural gas, compressed
natural gas, liquefied natural gas or petroleum gas or hydrogen, as well
as biodiesel/diesel mixtures of at least 20-percent biodiesel A larger
credit is available for commercial property. To claim this credit, qualifying
property must have been put in service prior to 2010 or, in the case of
hydrogen related property, 2015.
Effect on Homeowners
Energy-efficient improvements. --Although the main thrust of the Energy
Tax Incentives Act of 2005 (Energy Act) is on energy producers and related
industries, individuals, including homeowners, were not forgotten. Owners
of existing homes will be entitled to a lifetime credit of up to $500
for energy-efficient improvements to their homes made in 2006 and 2007.
The credit is 10 percent of the cost of (1) energy-efficient improvements
plus the cost of (2) residential energy property expenditures. Qualifying
improvements must be expected to last for at least five years and include
those for insulation, windows, skylights, and doors, although only $200
can be attributed to expenditures for windows. Metal roofs coated with
heat-reducing pigments are also included.
The residential energy property expenditures included in the credit are
broken down into three components each with their own separate limits: