By MIKE SPECTOR
The clock is ticking. Car buyers have until the end of the year to get a tax credit for buying a Honda Civic hybrid, one of the more popular fuel-saving vehicles on the market.
The dying tax credit is the latest in a series of changes chipping away at the financial incentives to buy a hybrid. Tax breaks tied to Toyota Motor Corp.'s strong-selling Prius, which gets about 46 miles a gallon, and its other hybrid models ended about a year ago. Now, the federal government is phasing out the same incentives on Honda Motor Co.'s Civic hybrid, which gets 42 miles a gallon.
Combine that with the fact that fuel prices have fallen from their historic highs above $4 a gallon this summer, and it's getting a lot more expensive to be an environmentally conscious driver.
Hybrid tax incentives start to go away when a car maker sells its 60,000th alternative-fuel vehicle, a level Toyota reached in mid-2006 and Honda hit in the third quarter of 2007. The amount of the tax credit is first reduced by 50% before disappearing altogether over several months. Honda's tax credit, currently $525, will be phased out by Dec. 31, according to the Internal Revenue Service. The Civic credit had been as high as $2,100 before the phase-out began in January 2008.
Sales of hybrids, though still only about 2% of the overall market, have grown rapidly since the Prius made its debut in the U.S. in 2000. Toyota and Honda were the first to have these vehicles in dealer showrooms when fuel prices started skyrocketing in the past few years.
Hybrids get better mileage because they pair a traditional internal-combustion engine with an electric motor, which is powered by a rechargeable battery. Electric motors boost power to the regular gas engine, allowing auto makers to install smaller, more-efficient motors in hybrid cars. Some hybrids run on electric power alone at low speeds, further saving fuel.
Less Economical
Higher sticker prices and lower fuel costs make hybrids less economical than their gas-engine counterparts because it takes far longer to earn back the hybrid's price premium through savings at the pump. Hybrids can cost anywhere from $2,000 to $7,000 more than conventionally powered cars. The Honda Civic hybrid retails for $21,954, compared with $17,820 for a conventional Civic, according to Edmunds.com, an auto-research firm.
The tax credits, created as part of the Energy Policy Act of 2005, effectively provide discounts on hybrids and other alternative-fuel cars up to $3,000 and sometimes even more, which help shorten that payback period.
For instance, let's say you buy a Honda Civic, which gets 42 mpg and currently has a $525 credit. Assume you drive 15,000 miles a year with gas prices at $2.91 a gallon. The Civic hybrid's price is some $4,000 higher than a gas-engine Civic, meaning it would take nearly 10 years to recoup the premium in gas savings, according to an Edmunds analysis.
Without the $525 credit, the payback period would be about a year longer, according to Edmunds. With the full $2,100 credit, the payback period would have been only six years.
"If you look at it strictly from a short-term payback perspective, without the tax credits, hybrids make absolutely no sense for the average driver," says Kim Korth, president of IRN Inc., a consulting firm in Grand Rapids, Mich. "The tax credit at least made it neutral, if not positive."
A Honda spokesman says the auto maker has no plans to discount its Civic hybrid in light of the disappearing credit. Next year, Honda is releasing a new Insight model, expected to be priced around $19,000, much cheaper than most other hybrids, though it will not be eligible for a tax credit.
In any event, many customers have grown accustomed to hybrids' higher prices and buy them to brandish their environmental credentials, not save money. So dealers and analysts don't expect Toyota and Honda hybrids to suffer disproportionately to other vehicles in today's depressed auto market.
Still, the built-in discount remains a lure for many shoppers. When the $3,150 tax credit on Toyota's Prius started to dwindle in October 2006, so too did its sales. "Prius sales fell off a cliff," says Earl Stewart, a Toyota dealer in Lake Park, Fla. "It was like someone turned the faucet off."
New Prius Incentives
Manufacturer discounts on hybrids have been rare, but that sales dip prompted Toyota to increase its incentives on the Prius, on top of any remaining government tax breaks. By March 2007, Toyota's average Prius discount had risen to $1,471 from just $54 the previous September, according to Edmunds. Prius sales eventually rebounded and have remained relatively strong over the past year or so. Mr. Stewart says his October Prius sales were the best in about a year despite tough economic conditions.
Manufacturers currently offering full tax credits for their hybrids include General Motors Corp. and Ford Motor Co. GM's 2008 Chevrolet Malibu hybrid, which gets about 27 mpg, offers a $1,300 credit. Ford's 2009 Escape hybrid, a small sport-utility vehicle that gets about 32 mpg, has a $3,000 credit for its two-wheel drive version. The same goes for Ford's two-wheel drive Mercury Mariner hybrid.
A full $2,350 tax credit attracted Steven Suher, a 63-year-old salesman in Seekonk, Mass., to Nissan Motor Co.'s Altima hybrid, which gets about 34 mpg. Nissan hasn't come close to selling 60,000 alternative-fuel vehicles, so buyers still get the full tax break on its hybrids.
In March, Mr. Suher bought an Altima hybrid for his wife. He liked it so much that he traded in his Subaru Tribeca to get one for himself. The tax break "was a big factor," Mr. Suher says. "That offset the difference considerably between the hybrid and the non-hybrid." (The Altima hybrid costs about $3,400 more than the non-hybrid model, according to Edmunds.)
Recouping the Premium
In Edmunds's analysis, it would still take about nine and a half years to recoup the Altima hybrid's premium at the pump. But that time frame would balloon to 16 years without the tax credit. With gas at $4 a gallon, it would take about seven years.
Another option for fuel-conscious drivers: clean diesel, which pollutes less in some cases than gasoline-powered cars. Volkswagen AG's 2009 Jetta sedan and Jetta SportWagen each offer a $1,300 tax break. Both get about 34 mpg, featuring turbocharged engines that run on ultra-low-sulfur diesel. Daimler AG's Mercedes-Benz also has a few small diesel SUVs that boast credits ranging from $900 to $1,800. Diesel fuel currently costs more than gasoline, but tends to be more efficient.
Of course, shoppers can also nab fuel-efficient conventionally powered small cars like the Toyota Corolla and Ford Focus. Both models get about 35 mpg and feature discounts in certain regions.
Some analysts say Congress could revisit the expiration of these tax credits in another round of economic stimulus legislation next year. But auto lobbyists expect lawmakers to focus any new incentives on the next wave of technological advances, such as electric plug-in cars.
Write to Mike Spector at mike.spector@wsj.com
The clock is ticking. Car buyers have until the end of the year to get a tax credit for buying a Honda Civic hybrid, one of the more popular fuel-saving vehicles on the market.
The dying tax credit is the latest in a series of changes chipping away at the financial incentives to buy a hybrid. Tax breaks tied to Toyota Motor Corp.'s strong-selling Prius, which gets about 46 miles a gallon, and its other hybrid models ended about a year ago. Now, the federal government is phasing out the same incentives on Honda Motor Co.'s Civic hybrid, which gets 42 miles a gallon.
Combine that with the fact that fuel prices have fallen from their historic highs above $4 a gallon this summer, and it's getting a lot more expensive to be an environmentally conscious driver.
Hybrid tax incentives start to go away when a car maker sells its 60,000th alternative-fuel vehicle, a level Toyota reached in mid-2006 and Honda hit in the third quarter of 2007. The amount of the tax credit is first reduced by 50% before disappearing altogether over several months. Honda's tax credit, currently $525, will be phased out by Dec. 31, according to the Internal Revenue Service. The Civic credit had been as high as $2,100 before the phase-out began in January 2008.
Sales of hybrids, though still only about 2% of the overall market, have grown rapidly since the Prius made its debut in the U.S. in 2000. Toyota and Honda were the first to have these vehicles in dealer showrooms when fuel prices started skyrocketing in the past few years.
Hybrids get better mileage because they pair a traditional internal-combustion engine with an electric motor, which is powered by a rechargeable battery. Electric motors boost power to the regular gas engine, allowing auto makers to install smaller, more-efficient motors in hybrid cars. Some hybrids run on electric power alone at low speeds, further saving fuel.
Less Economical
Higher sticker prices and lower fuel costs make hybrids less economical than their gas-engine counterparts because it takes far longer to earn back the hybrid's price premium through savings at the pump. Hybrids can cost anywhere from $2,000 to $7,000 more than conventionally powered cars. The Honda Civic hybrid retails for $21,954, compared with $17,820 for a conventional Civic, according to Edmunds.com, an auto-research firm.
The tax credits, created as part of the Energy Policy Act of 2005, effectively provide discounts on hybrids and other alternative-fuel cars up to $3,000 and sometimes even more, which help shorten that payback period.
For instance, let's say you buy a Honda Civic, which gets 42 mpg and currently has a $525 credit. Assume you drive 15,000 miles a year with gas prices at $2.91 a gallon. The Civic hybrid's price is some $4,000 higher than a gas-engine Civic, meaning it would take nearly 10 years to recoup the premium in gas savings, according to an Edmunds analysis.
Without the $525 credit, the payback period would be about a year longer, according to Edmunds. With the full $2,100 credit, the payback period would have been only six years.
"If you look at it strictly from a short-term payback perspective, without the tax credits, hybrids make absolutely no sense for the average driver," says Kim Korth, president of IRN Inc., a consulting firm in Grand Rapids, Mich. "The tax credit at least made it neutral, if not positive."
A Honda spokesman says the auto maker has no plans to discount its Civic hybrid in light of the disappearing credit. Next year, Honda is releasing a new Insight model, expected to be priced around $19,000, much cheaper than most other hybrids, though it will not be eligible for a tax credit.
In any event, many customers have grown accustomed to hybrids' higher prices and buy them to brandish their environmental credentials, not save money. So dealers and analysts don't expect Toyota and Honda hybrids to suffer disproportionately to other vehicles in today's depressed auto market.
Still, the built-in discount remains a lure for many shoppers. When the $3,150 tax credit on Toyota's Prius started to dwindle in October 2006, so too did its sales. "Prius sales fell off a cliff," says Earl Stewart, a Toyota dealer in Lake Park, Fla. "It was like someone turned the faucet off."
New Prius Incentives
Manufacturer discounts on hybrids have been rare, but that sales dip prompted Toyota to increase its incentives on the Prius, on top of any remaining government tax breaks. By March 2007, Toyota's average Prius discount had risen to $1,471 from just $54 the previous September, according to Edmunds. Prius sales eventually rebounded and have remained relatively strong over the past year or so. Mr. Stewart says his October Prius sales were the best in about a year despite tough economic conditions.
Manufacturers currently offering full tax credits for their hybrids include General Motors Corp. and Ford Motor Co. GM's 2008 Chevrolet Malibu hybrid, which gets about 27 mpg, offers a $1,300 credit. Ford's 2009 Escape hybrid, a small sport-utility vehicle that gets about 32 mpg, has a $3,000 credit for its two-wheel drive version. The same goes for Ford's two-wheel drive Mercury Mariner hybrid.
A full $2,350 tax credit attracted Steven Suher, a 63-year-old salesman in Seekonk, Mass., to Nissan Motor Co.'s Altima hybrid, which gets about 34 mpg. Nissan hasn't come close to selling 60,000 alternative-fuel vehicles, so buyers still get the full tax break on its hybrids.
In March, Mr. Suher bought an Altima hybrid for his wife. He liked it so much that he traded in his Subaru Tribeca to get one for himself. The tax break "was a big factor," Mr. Suher says. "That offset the difference considerably between the hybrid and the non-hybrid." (The Altima hybrid costs about $3,400 more than the non-hybrid model, according to Edmunds.)
Recouping the Premium
In Edmunds's analysis, it would still take about nine and a half years to recoup the Altima hybrid's premium at the pump. But that time frame would balloon to 16 years without the tax credit. With gas at $4 a gallon, it would take about seven years.
Another option for fuel-conscious drivers: clean diesel, which pollutes less in some cases than gasoline-powered cars. Volkswagen AG's 2009 Jetta sedan and Jetta SportWagen each offer a $1,300 tax break. Both get about 34 mpg, featuring turbocharged engines that run on ultra-low-sulfur diesel. Daimler AG's Mercedes-Benz also has a few small diesel SUVs that boast credits ranging from $900 to $1,800. Diesel fuel currently costs more than gasoline, but tends to be more efficient.
Of course, shoppers can also nab fuel-efficient conventionally powered small cars like the Toyota Corolla and Ford Focus. Both models get about 35 mpg and feature discounts in certain regions.
Some analysts say Congress could revisit the expiration of these tax credits in another round of economic stimulus legislation next year. But auto lobbyists expect lawmakers to focus any new incentives on the next wave of technological advances, such as electric plug-in cars.
Write to Mike Spector at mike.spector@wsj.com
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