Yesterday the IRS announced that Toyota has reached the sales target of 60,000 hybrid vehicles, which triggers a reduction of the credit for hybrid fuel vehicles allowable to eligible taxpayers. (See IR 2006-145, and Notice 2006-78 (forthcoming in a couple weeks) for further details.) Effective on October 1, 2006, Toyota hybrid vehicles are eligible only for 50 percent of the allowable credit, instead of the full credit. The reduced credit amounts range from $1575 for the Prius to $775 for the Lexus GS 450h. The popular Camry and the Highlander SUV gets only $1300, while the Lexus RX400H gets $1100. Those figures drop by half on or after April 1, 2007.
What about other hybrid vehicles? Well, they are not so popular, so until they reach their sales goal, they get the full credit as an additional incentive to purchase them. What do you think about this, Comrades?
It seems our government wanted to incentivize purchases of these vehicles. While all manufacturers had access to the same target incentive (amounts of which varied based on improvement in fuel economy – hence the lower benefit for the big Lexus above) this allowed a level playing field among competitors. (However, as discussed in previous blogs, it also distorted a purchase decision that, in many cases, did not make economic sense. With gas now selling at $2.11 (10% ethanol blend) in my neighborhood, I would guess it makes even less economic sense.)
However, once the market had 60,000 vehicles from each manufacturer, the credits were scheduled to reduce. Unfortunately, they are not reduced for everyone, just for the successful manufacturer. Those automakers who make less popular products, who thus could not compete as effectively in the marketplace, still get their incentives. Thus, we are effectively handicapping this sporting match, much like giving the weaker players several strokes and letting them compete with Tiger Woods.
I didn’t like this credit at the start, and now I really don’t like the credit. Though I am glad it will phase out eventually, it should phase out for all manufacturers at the same time. In fact, I find it hard to justify why we are discriminating against Toyota, the successful competitor in this case.