As U.S. consumers confront spiraling gasoline prices, there is some good news on the federal policy front to help ease the burden. Provisions in the new Energy Policy Act of 2005, which President Bush signed into law on August 8, will help more Americans get behind the wheel of a hybrid vehicle so they can vastly reduce their gasoline expenses. Already, hybrid electric vehicles (aka hybrids) have been gaining press and market share in the United States, and the tax credits included in the new energy policy law will make hybrids more affordable.

Hybrid Vehicle Tax Incentives

The new energy law provides valuable federal income tax credits, ranging in value from $250 to $3,400, for purchasers of hybrid cars and light trucks. These tax credits are more valuable than the current $2,000 federal tax deduction that remains in effect through the end of this year. That's because a deduction simply reduces the taxpayer's taxable income, while a tax credit is money deducted from the final tax bill owed to Uncle Sam.

Also, while the current federal tax deduction is the same for all hybrid purchases, the new tax incentive system will base the credit value on two factors: a fuel efficiency credit and a conservation credit. The bottom line is that the higher the hybrid's fuel economy, and the more fuel it saves, the larger the federal tax credit. According to the American Council for an Energy-Efficient Economy, the purchaser of a 2005 Toyota Prius would be eligible for a tax credit of $3,150, for example, while the purchaser of a Honda Accord Hybrid would receive a $650 federal income tax credit.

The IRS, working with EPA and DOT, will establish the criteria that will determine the size of the tax credit for each vehicle.

While the light-duty hybrid tax credits are available for the next five years (2006 through 2010), there is one limitation - only 60,000 vehicles per manufacturer will be eligible for the full tax credit. Once a manufacturer reaches 60,000 sales, the vehicles sold during the next four calendar quarters will be eligible only for a percentage of the full tax credit: 50 percent of the full credit amount for the following two quarters; 25 percent for the next two quarters; and none after that.

Historically, Honda and Toyota have had the lion's share of hybrid vehicles in the marketplace. Therefore, they may reach the cap sooner than some of the domestic automobile manufacturers, which have been slower to bring large numbers of hybrid vehicles to the market.

Hybrids Accessing High Occupancy Vehicle (HOV) Lanes

In addition to providing these new consumer tax credits to spur the purchase and use of hybrid vehicles, the federal government also is allowing states the discretion to allow single-occupant hybrid vehicles to use high occupancy vehicle (HOV) lanes. Specifically, the new highway law allows "energy-efficient" vehicles to use those lanes if the Environmental Protection Agency (EPA) certifies that the vehicles achieve at least a 50 percent increase in city fuel economy or at least a 25 percent increase in combined city/highway fuel economy relative to a comparable internal combustion engine vehicle. The highway law also allows states to set stricter standards if they so choose, thereby restricting the numbers of hybrids that could eventually travel state highways. The HOV exemption is available through Sept 30, 2009, and EPA has six months to establish rules for certifying vehicles as "energy efficient" and for developing appropriate vehicle labels.

Until now, the only hybrid drivers who have been legally able to travel in HOV lanes as single occupants are those traveling the highways of Virginia. The Federal Highway Administration determined that Virginia could serve as the pilot test case for the country on this issue, and it certainly boosted the hybrid market, making Virginia second only to California in hybrid sales in the U.S. Many observers believe this non-financial incentive played a key role in boosting hybrid sales in the commonwealth.

Thanks to the new highway law, an increasing number of consumers across the country will have the option of commuting in HOV lanes with hybrids as long as their state determines that it wants to promote hybrids in this manner.

State Policies to Encourage Hybrids

In recognition of the important role that states can play in helping to reduce the amount of petroleum used in the transportation sector, the Alliance to Save Energy recently completed a new handbook that provides states with information on a variety of financial and non-financial incentives to help consumers purchase energy-efficient light-duty transportation technologies, like hybrid vehicles. Entitled The Drive to Efficient Transportation: State Policies to Encourage the Purchase and Use of Light-Duty Advanced Technology Vehicles and Alternative Fuels, and developed with support from Ford Motor Company, the handbook offers state policy makers a menu of policy options to spur the purchase and use of advanced-technology vehicles.

To obtain a free copy of the handbook, click here