Green Car Tax Credits: a Primer

April 29, 2016

In the twenty-first century, car manufacturers have embraced the future and begun rolling out variations on the theme of “green” cars. Hybrid, electric, biodiesel, and compressed natural gas (CNG) are the current flavors of green cars on the market in 2014. Alternative fuel vehicles (AFVs) are attractive to consumers because of the lessened (or nonexistent) reliance on gasoline.

Additionally, governments appreciate the lower emissions from these vehicles. Since 2006, the federal and many state governments have been offering perks to owners of green cars – from tax credits to access to the HOV lanes regardless of the number of passengers in the vehicle.

Federal Green Car Tax Credit

Those who bought hybrid car before January 1, 2011 were eligible for a federal tax credit under the American Recovery and Reinvestment Act. Fortunately, there are still federal tax credits available for those purchasing an electric (plug-in) car in the next year or two.

How does it work?

The federal tax credit applies to the first 200,000 electric vehicles sold by each manufacturer.  After that number is reached, the available credit will drop by 50% in the following two quarters, 75% in the third quarter, and will disappear completely one year after the cap is reached.  In 2011, approximately 17,500 plug-in cars were sold; in 2012 that number doubled to 53,000, and in 2013 it nearly doubled again, with 97,000 plug-in cars sold in America. That’s still fewer than 200,000 cars total, and the cap is set at 200,000 vehicles per manufacturer.  Most car manufacturers have some version of an electric car: General Motors has the Volt; Nissan makes the Leaf; Toyota’s Prius also comes in a plug-in model; Tesla makes exclusively plug-in cars; even BMW joined the market with its new i3.

The amount of the tax credit is based on the power generated by the car’s battery.  A battery’s output is measured in kilowatt-hours (kWh), or the amount of energy generated in one hour.  For comparison, a standard lava lamp is powered by a 40 watt bulb, which emits 0.04 kWh in an hour.  An electric car battery, for obvious reasons, generates far more power.  The credit is for $2,500 for the first five kWh in a battery, and then an additional $417 for each additional kWh of output.  The maximum credit is $7,500, so if your battery produces more than about 16 kWh of power, you’ve maxed out the credit (but you could power about four hundred lava lamps for one hour).

It’s important to understand the difference between a credit and a rebate.  Unlike a rebate, which is a check in the mail no-questions-asked, a credit comes directly out of your tax liability for the preceding year.  If you earned a $7,500 rebate but are only paying $6,000 in taxes, your liability drops to zero but the remaining $1,500 goes away – you don’t earn money towards tax you owe in the future.

Green Car Tax Credits by State

Many states offer additional perks for owners of green cars.  Below are ten states which offer assorted discounts, credits, and benefits for owners of green cars.  Many states’ laws are complicated and this list is by no means exhaustive; visit your state legislature’s website for more details.

  • California: Up to $2,500 rebate for qualified vehicles; access to HOV/HOT lanes regardless of passengers in vehicle; some vouchers depending on location: California has also passed laws which facilitate infrastructure for green vehicles. New York: HOV lane access on Long Island Expressway; no sales or use tax for fuel; use of otherwise-restricted tunnels. North Carolina: HOV lane access; no fuel tax for green fuels.
  • Texas: Up to $2,500 rebate for the incremental vehicle cost; up to $3,500 to replace with another clean vehicle; $2,000 rebate for NGV and $3,000 for conversion to an NGV for up to 5 vehicles per customer.
  • Indiana: tax credit for producers of ethanol, and for producers and blenders of biodiesel in IN; rebate offered for CNG conversions. special charging rates for electric cars.
  • Iowa: Tax refund for biodiesel producers; deduction available for purchase of qualified vehicle before January 1 2015.
  • Montana: Up to 50% tax credit for cost of converting vehicles to alternate fuels; 15% tax credit for equipment used in producing or blending biodiesel with petroleum fuels.
  • Oklahoma: One-time tax credit for 50% of incremental cost of purchasing AFV (excluding electrics); biofuels produced and used by an individual only are exempt from fuel excise tax; low-cost loans to consumers for converting vehicles to CNG; government assistance for infrastructure; lower tax on CNG fuel through 2020.
  • Washington: Vehicles that meet specific Alternative Fuel Vehicle criteria are exempt from sales and use taxes (but CNG and propane-powered vehicle owners must pay a licensing fee annually); they are exempt from emissions inspections; state laws facilitate ease of access to electric vehicle charging stations.

Green Car Fees

Depending on which state you live in, there may be some downsides to owning a green car. Some states have imposed a fee on green car owners to offset the money lost due to lost gasoline sales. States justify this levy because the gas tax that consumers pay at the pump funds public roadways; nonstandard-fuel consumers use the same roads, but do not contribute to their maintenance through the gasoline tax. The green-car taxes attempt to recoup some of the money lost at the pump. Currently, Virginia requires a $64 yearly fee; Washington state and North Carolina demand a $100 yearly fee; and legislatures in New Jersey and Oregon are considering a per-mile fee for green-car owners.

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