Alternative Fuel Vehicle Tax Incentives and the CLEAR ACT

Alternative Fuel Vehicle Tax Incentives and the CLEAR ACT

Order Code RS21277
Updated December 17, 2004
CRS Report for Congress
Received through the CRS Web
Alternative Fuel Vehicle Tax Incentives and
the CLEAR ACT
Brent D. Yacobucci
Specialist in Energy Policy
Resources, Science, and Industry Division
Summary
Alternative fuels (non-petroleum fuels such as natural gas and electricity) and
advanced technology vehicles face significant market barriers, such as high vehicle
purchase price and low availability of refueling infrastructure. In current law, there are
tax incentives to encourage the purchase of these vehicles and to build new
infrastructure to support them. In the 108th Congress, the Clean Efficient Automobiles
Resulting from Advanced Car Technologies Act (CLEAR ACT, H.R. 1054 and S. 505)
would have extended and expanded current incentives, and established new incentives.
Some CLEAR ACT provisions were inserted into H.R. 6, the comprehensive energy bill.
Introduction. Alternative fuel and advanced technology vehicles face significant
barriers to wider acceptance as passenger and work vehicles.1 Often, these vehicles are
more expensive than their conventional counterparts. Further, fueling the vehicles is often
inconvenient because the number of refueling stations for alternative vehicles is very
small compared to the number of gasoline stations nationwide. However, many of these
vehicles have superior efficiency and/or environmental performance compared to
conventional vehicles. Thus, there has been significant interest in promoting these
vehicles as a response to environmental and energy security concerns.
Currently, there are individual and business tax incentives for the purchase of
alternative fuel and advanced technology vehicles and for the installation of alternative
fuel infrastructure. There are also federal and state fleet purchase requirements for
alternative fuel vehicles. In the 108th Congress, H.R. 1054 and S. 505, the Clean Efficient
Automobiles Resulting from Advanced Car Technologies Act (CLEAR ACT), would
1 Alternative fuels vehicles include vehicles powered by non-petroleum fuels such as natural gas,
electricity, or alcohol fuels. Advanced technology vehicles include hybrid vehicles, which
combine a gasoline engine with an electric motor system to boost efficiency. For more
information on these vehicles, see CRS Report RL30758, Alternative Transportation Fuels and
Vehicles, and CRS Report RL30484, Advanced Vehicle Technologies.
Congressional Research Service ˜ The Library of Congress

CRS-2
have expanded the existing tax incentives. Because of recent concerns over energy
dependence and high energy costs, some language from the CLEAR ACT was inserted
H.R. 6, the comprehensive energy bill.2
This report discusses current federal tax incentives for alternative fuel and advanced
technology vehicles. It also outlines how the CLEAR ACT would change those
incentives.
Existing Tax Incentives. Currently, there are two federal tax incentive programs
for the purchase of non-conventional vehicles. These are the Electric Vehicle (EV) Tax
Credit, and the Clean Fuel Vehicle tax deduction. There is also a deduction for the
installation of alternative fuel infrastructure.
Electric Vehicle Tax Credit. For 2005, there is a federal tax credit worth 10%
of the purchase price of an electric vehicle, up to a maximum of $2,000. (26 U.S.C. 30)
The credit is reduced to $1,000 in 2006, and will be fully phased out after 2006. The
credit must be taken in the year the vehicle is purchased.
Clean Fuel Vehicle Tax Deduction. For the purchase of alternative fuel
vehicles, as well as hybrid electric vehicles, there is a Clean Fuel Vehicle Tax Deduction
(26 U.S.C. 179A). The amount of the deduction is based on the weight of the vehicle.
Vehicles under 10,000 pounds gross vehicle weight (i.e. cars and light trucks) qualify for
a $1,000 deduction in 2005; those between 10,000 and 26,000 pounds qualify for a $2,500
deduction. Vehicles above 26,000 pounds qualify for a $25,000 deduction. The
deduction will be reduced to half of the 2005 value in 2006, with the deduction eliminated
after 2006. Until recently, hybrid electric vehicles were not considered “clean fuel
vehicles” because the primary fuel for the vehicles is gasoline. However, in May 2002,
the Internal Revenue Service (IRS) announced that taxpayers can claim the deduction for
hybrids.3
Fueling Infrastructure Tax Deduction. Businesses that install alternative fuel
refueling infrastructure can claim a tax deduction of up to $100,000. (26 U.S.C. 179A)
This deduction is eliminated at the end of 2006.
The CLEAR ACT (108th Congress). The CLEAR ACT would expand and
extend the existing tax incentives for non-conventional vehicles. Two versions of the bill
were introduced in the 108th Congress and were referred to the House Ways and Means
and Senate Finance Committees, respectively. The conference report on H.R. 6 contained
several provisions substantially similar to the CLEAR ACT.
2 The Senate passed H.R. 6 on July 31, 2003; the House passed the bill on April 11. The
conference committee on H.R. 6 issued its report (H.Rept. 108-375) November 17. The House
approved the report on November 18. On November 21, a cloture motion on the bill failed in the
Senate.
3 Further, taxpayers who purchased hybrids in previous years may file an amended return to claim
the deduction.

CRS-3
The CLEAR ACT contains the following key provisions:
! create a new tax credit for the purchase of fuel cell vehicles;
! expand and extend the existing electric vehicle (EV) purchase tax credit;
! replace the existing clean fuel vehicle tax deduction with an alternative
fuel vehicle tax credit;
! create a new tax credit for the purchase of hybrid electric vehicles;
! replace the existing deduction for the installation of refueling
infrastructure with a tax credit; and
! create a new tax credit for the retail sale of alternative fuel.
As introduced, the House and Senate versions of the CLEAR ACT were identical.
Fuel Cell Vehicle Purchase Tax Credit. The CLEAR ACT would provide a
tax credit for the purchase of a fuel cell vehicle. The credit increases with the gross
vehicle weight (GVW) of the vehicle, as shown in Table 1. Passenger vehicles that
achieve at least 50% better fuel economy than a comparable conventional vehicle also
qualify for an additional tax credit of between $1,000 and $4,000, depending on overall
fuel economy and the year of purchase. All three versions of H.R. 6 contain similar
provisions, but the maximum credit for passenger vehicles is lower. Further, the credit
would expire earlier under both versions of H.R. 6 (after 2011 for the Senate version, and
after 2012 in the House and Conference versions, as opposed to after 2013 in the CLEAR
ACT).
Table 1. Fuel Cell Vehicle Purchase Tax Credit
Gross Vehicle Weight
Up to 8,500
8,501 to
14,001 to
Over 26,000
pounds
14,000 pounds
26,000 pounds
pounds
CLEAR ACT
$4,000 to
$10,000
$20,000
$40,000
$12,000,
depending on fuel
economy and year
of purchase
H.R. 6
$4,000 to $8,000,
$10,000
$20,000
$40,000
(Conference,
depending on fuel
House, and
economy
Senate
Versions)
Electric Vehicle Purchase Tax Credit. Under the act, the new EV tax credit
would be structured similarly to the fuel cell vehicle credit discussed above. There are
two key differences, however. First, instead of the fuel economy credit given for fuel cell
vehicles, EVs would qualify for a range/payload credit. If the vehicle is capable of
carrying a payload of 1,000 pounds or is capable of traveling 100 miles on a single charge,
an additional credit is provided. Second, the credit would expire after 2009. In addition

CRS-4
to the EV credit, low-speed4 EVs qualified for a credit equal to 10% of the purchase price
up to a maximum of $1,500. The Senate version of H.R. 6 would also extend and expand
the EV credit. However, the amount of the credit would vary slightly, and the credit
would expire earlier (after 2006 as opposed to after 2009). The House and conference
versions of H.R. 6 would repeal the phaseout of the credit, but would not change the
amount of the credit, nor would they extend the credit beyond 2004.
Table 2. Electric Vehicle Purchase Tax Credit
Gross Vehicle Weight
Up to 8,500
8,501 to
14,001 to
Over 26,000
pounds
14,000 pounds
26,000 pounds
pounds
CLEAR ACT
$4,000 to $6,000
$10,000
$20,000
$40,000
H.R. 6 (Senate
$3,500 to $6,000
$10,000
$20,000
$40,000
Version)
Alternative Fuel Vehicle Tax Credit. The CLEAR ACT would replace the
existing clean fuel vehicle tax deduction with a credit for the purchase of a new
alternative fuel vehicle (AFV). The new credit would be equal to a percentage of the
incremental cost of the AFV, subject to certain maximum dollar amounts. The
incremental cost is the difference between the cost of the AFV and its conventional
counterpart. Under the act, the applicable percentage would be 50% of the incremental
cost plus an additional 30% if the vehicle met certain emissions requirements. The
maximum credit is based on the weight of the vehicle, as shown in Table 3. The Senate
and conference versions of H.R. 6 would also establish an alternative fuel vehicle credit,
but the applicable percentages would be lower (40% of incremental cost, plus an
additional 30% if certain emissions requirements were met). The House version of H.R.
6 would not create a new tax credit for alternative fuel vehicles, but would eliminate the
phaseout of the existing clean fuel vehicle deduction.
Table 3. Maximum Alternative Fuel Vehicle Tax Credit
(Percentage Based on Incremental Cost)
Gross Vehicle Weight
Up to 8,500
8,501 to
14,001 to
Over 26,000
pounds
14,000 pounds
26,000 pounds
pounds
CLEAR ACT
50%-80%, up to
50%-80%, up
50%-80%, up
50%-80%, up
$5,000
to $10,000
to $25,000
to $40,000
H.R. 6
40%-70%, up to
40%-70%, up
40%-70%, up
40%-70%, up
(Conference
$5,000
to $10,000
to $25,000
to $40,000
and Senate
Versions)
4 A low-speed vehicle is one which is street-legal, but only on roads with a posted speed limit of
35 miles per hour or less.

CRS-5
To qualify for the credit, the vehicle is required to be a “dedicated” AFV. This
means that the vehicle must not be capable of operating using conventional fuel. This
provision is a response to criticisms of previous AFV requirements or incentives that
included “dual fuel” vehicles.5 In many cases, those who purchased dual fuel vehicles
actually operated them solely on gasoline. Because some fuels that qualify as alternative
fuels (e.g., methanol) must be blended with a small amount of gasoline, vehicles using
these fuels qualify for a prorated tax credit.
Hybrid Electric Vehicle Tax Credit. Under the CLEAR ACT, the existing clean
fuel vehicle deduction for hybrid electric vehicles would be replaced with a tax credit.
The amount of the credit is based on several factors. For passenger vehicles, these factors
include the percentage of power provided by the electrical components in the hybrid
system and any fuel economy improvements over conventional vehicles. For heavy-duty
vehicles (over 8,500 pounds), the factors are the power supplied by the electrical system,
and the emissions performance of the vehicle. In the case of heavy-duty vehicles, the
extra credit for emissions performance would have be phased out between 2003 and 2007.
The range of potential credits for each vehicle weight are shown in Table 4. The Senate
version of H.R. 6 would establish a similar credit, but with different levels. The House
version of H.R. 6 contains no similar provision. The conference version of H.R. 6 would
establish a credit for hybrids, but the system for calculating the passenger vehicle credit
would be based on fuel economy and fuel savings, while the heavy duty vehicle credit
would be a percentage (based on fuel economy) of the incremental cost, up to a set
maximum.
Table 4. Hybrid Vehicle Tax Credit
Gross Vehicle Weight
Up to 8,500
8,501 to
14,001 to
Over 26,000
pounds
14,000 pounds
26,000 pounds
pounds
CLEAR ACT
$250 to $4,000
$1,500 to
$4,000 to
$6,000 to
$5,500
$13,750
$22,000
H.R. 6 (Senate
$250 to $4,000
$1,500 to
$4,000 to
$6,000 to
Version)
$6,000
$15,000
$24,000
H.R. 6
$400 to $3,400
up to $7,500
up to $15,000
up to
(Conference
$30,000
Version)
Alternative Fuel Refueling Infrastructure. The CLEAR ACT replaces the
existing deduction for the installation of alternative fuel infrastructure with a tax credit.
The credit would have be equal to 50% of the purchase or installation cost of the refueling
property, subject to a maximum dollar amount. In the case of retail property, the
maximum credit is $30,000. For residential property, the maximum is $1,000. Further,
for sites that supply hydrogen fuel, property used to produce the fuel on-site would also
qualify. The credit would expire after 2013 for hydrogen infrastructure; for all other fuels,
5 A dual fuel vehicle is one capable of operating using either an alternative fuel or a conventional
fuel, such as gasoline.

CRS-6
the credit would expire after 2009. The Senate version of H.R. 6 would provide the same
tax credit, but would expire earlier (after 2011 for hydrogen infrastructure and after 2006
for all other fuels). The House version of H.R. 6 contains no similar provision. The
conference report would extend the existing deduction through the end of 2008 (the end
of 2011 for hydrogen infrastructure).
Alternative Fuel Sales Credit. In addition to the above credits, the CLEAR
ACT provides a credit for the retail sale of alternative fuel. Under the act, the credit is
equal 30 to 50 cents per gasoline equivalent gallon (GEG)6 of alternative fuel sold,
depending on the year. The credit would expire after 2013 for hydrogen, and after 2008
for all other fuels. The Senate version of H.R. 6 would establish a credit at the same
levels, but the credit for all fuels would expire after 2006. The House and conference
versions contain no similar provision.
Lean-Burn Vehicle Credit. The conference version of H.R. 6 would also
establish a tax credit for the purchase of passenger vehicles with “lean-burn” engines. By
and large, vehicles that qualify would be diesel-powered vehicles that meet certain
emissions and fuel economy standards. The tax credit would range from $400 to $3,400,
based on fuel economy and fuel savings.
6 Because fuels vary in energy content, an amount of fuel with equivalent energy of one gallon
of gasoline is used for comparison.