The Cost of Unstable Federal Tax Law, Part II

December 22, 2005

As the year comes to a close, taxes are always on the minds of individuals who are at the margin of making an economic decision. This is because nearly every January 1st some statute in the federal tax code is amended. Take for example this story from USA Today on consumers postponing their purchases of hybrid cars in order to capture a huge tax bonus that begins in January:

Buyers of the popular Toyota Prius hybrid, after waiting months to get their cars, now are telling dealers to keep them until next month so the buyers can qualify for what’s likely to be a much bigger hybrid tax break in 2006.

“I’ve got cars on the ground that I’d had (on) order for 18 months, and the customers want delivery after the first of the year,” says Debbie Tufts, new car sales manager at Rudy Luther Toyota in Golden Valley, Minn.

“We have seen it around the country,” Toyota spokeswoman Nancy Hubbell says.

Stating Jan. 1, buyers of gas-electric hybrid vehicles get tax credits that could lower their income tax bills as much as $3,150, according to an analysis by the American Council for an Energy-Efficient Economy.

The IRS hasn’t set the amounts, but the size of the credit depends largely on the government’s fuel-economy rating of the vehicle in city driving. Prius’ 60 mpg city rating makes it likely to qualify for the maximum, ACEEE says. That’s why it’s mainly Prius buyers putting their vehicles on hold. Ford Motor and Honda say they haven’t noticed the phenomenon with their hybrids, and Toyota hasn’t seen it with other Toyota and Lexus hybrids.

But hold on, there’s a catch — you can’t wait too long:

Waiting too long could backfire. The juicy tax credit begins to phase out after an automaker sells 60,000 of the hybrid vehicles. Toyota forecasts that Priuses sold the first three quarters of 2006 will qualify for the full credit. Automakers who sell fewer hybrids will be able to entice buyers with the credit into 2007 or beyond.

This guessing game for consumers on when is the best time to buy a new car is fallout from the energy bill that was signed into law earlier this summer. For more on the energy bill’s deficiencies and how it creates more complexity and instability in the federal tax code and more uncertainty for consumers and producers, check out our previous takes on the issue here, here, here, here, here, and here.

To check out video of the Tax Policy Blog’s appearance on Kudlow & Company back in July on this issue of the energy bill, click here.


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