SUVs

One of the peculiar results of some of the "business-friendly" provisions of the Bush tax law changes was an accelerated depreciation provision that gave tax incentives to people to buy huge SUVS that are harmful to the environment and to smaller cars who share the road with them.  See, for instance, this story from 2003 advising small business owners about the tax benefit of purchasing a heavy-enough SUV instead of a lighter passenger car and this article providing a good description of the way section 179 and regular depreciation rules worked to favor SUVs after the Jobs and Growth Tax Act of 2003.

Congress reacted to the complaints about the irrationality of a tax provision that encouraged small business owners to buy gas guzzlers by enacting some limitations on SUV depreciation in the 2004 Jobs Act. In 52 Federal Taxes Weekly Alert (April 20, 2006), the RIA addresses a recent Congressional Research Service (CRS) report that points out, however, that SUVs are still favored under the tax law.

Here's how it works.  Section 179 permits taxpayers to expense (deduct currently) much of the purchase price of certain property used in a trade or business.  For 2006, the total amount that can be expensed is $108,000, but the 2004 Jobs Act restricted the section 179 deduction for heavy SUVs (gross vehicle weight over 6000 pounds) to $25,000.  That is still considerably higher than the depreciation permitted for most passenger vehicles, which is limited under  Section 280F to $2,960 for a car put in service in 2006 or $3,260 for a light truck or van or SUV rated at 6000 pounds or less.  Thus, this provision still heavily favors heavy SUV purchases.

SUVs get tax breaks in another way.  Under section 4064, an excise tax applies to domestic sales of cars that don't satisfy fuel economy standards.  The tax ranges from $1000 to $7700.  The tax does not apply to autos that weigh more than 6000 pounds, so heavy SUVs are  exempt from the tax.  Ironically, those heavy SUVs represent just the type of gas-guzzling vehicle that the fuel economy standards were intended to disincentivize.  Congress has created a contradiction in terms--it imposes an excise tax on gas guzzlers, but  exempts the worst of the gas guzzlers from the gas guzzler tax!

At least some in Congress are thinking about the irrational preference for heavy SUVs in the current tax code.  But the idea is apparently to provide accelerated depreciation for more fuel-efficient cars (up to $100,000) rather than eliminate the depreciation benefit for heavy SUVs.  See, e.g., this article in the Mercury News about Grassley's planned legislation and the Grassley news release, here.  That proposal doesn't make sense.  Congress should simply remove the benefit for SUVs by making them subject to the same limits that generally apply to other vehicles.  (Have you read about the Artic ice melting?)