Tax Credits Expiring for New Hybrid Car Purchases

The tax credits for the most popular hybrid cars (Toyota Prius, Honda Civic, and Nissan Altima) are expiring or are about to expire. Without these tax breaks, it can take a lot longer for the fuel savings to make up for a hybrid vehicle's additional purchase price. Here are examples from The Los Angeles Times. A 2008 Camry hybrid sells for about $4,000 more than a regular Camry, With gas at $4.50 a gallon and no tax credit, it will take 6.4 years to make up the cost difference. A competing sedan, the Nissan Altima hybrid, costs about $4,400 more than its non-hybrid version but is eligible for a $2,350 tax credit. The payback period for the Altima is 3.7 years. Losing the credit also hurts the economics of buying a Prius, which continues to sell briskly even with dealer premiums of $3,000 or more tacked on.

According to the 2005 federal law that established the hybrid credit, the tax break begins to phase out after a manufacturer sells 60,000 qualifying vehicles. Mainly because of heavy demand for the Prius, Toyota reached that benchmark early in the program, and tax breaks for its Toyota and Lexus brand hybrids were gone by last October.

On Tuesday, the tax credit on the No. 3-selling Honda Civic hybrid will be cut in half, from $1,050 to $525. Honda hit the limit last year, and the original $2,100 tax credit on the Civic hybrid began phasing out Jan. 1.

Unlike a deduction, which lowers the amount of a person's income subject to taxation, a credit reduces the taxes owed on a dollar-for-dollar basis. In other words, a $2,100 tax credit is like getting a delayed $2,100 discount on the price of a new car. (The hybrid tax credit doesn't apply to used cars.)