PDF _ RL32173 - Tax Preferences for Sport Utility Vehicles (SUVs): Current Law and Legislative Initiatives in the 109th Congress
4-Apr-2006; Gary Guenther; 20 p.

Update: June 19, 2006

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Abstract: The surge in domestic popularity of large sport utility vehicles (SUVs) since the early 1990s has stirred a debate over what steps the federal government should take, if any, to mitigate their effects on the environment, highway safety, traffic congestion, and U.S. dependence on foreign sources of oil. Legislative activity in the 108th Congress expanded the scope of the debate to include the ways in which the federal tax code encourages the purchase of heavy-duty SUVs, primarily for business use. In May 2003, Congress passed a measure (the Jobs and Growth Tax Relief Reconciliation Act of 2003) that raised the maximum expensing allowance under section 179 of the Internal Revenue Code (IRC) for these vehicles to $100,000 from May 2003 through the end of 2005; the American Jobs Creation Act of 2004 lowered the allowance to $25,000, as of October 22, 2004.

This report examines current federal tax preferences for SUVs and legislation in the 109th Congress that would alter them. It will be updated to reflect subsequent legislative activity addressing the preferences.

One way in which the federal tax code can influence the purchase of heavy-duty SUVs for business use is through the tax treatment of depreciation for these vehicles. Under current tax law, the depreciation of passenger cars is treated less generously than that of light trucks (including many SUVs). Passenger cars, which are defined as motor vehicles weighing 6,000 pounds or less, are considered so-called listed property — and thus subject to annual limits on depreciation allowances. By contrast, light trucks, which are defined as motor vehicles weighing more than 6,000 pounds (with some exceptions), are generally depreciated under a different and more favorable set of rules. For example, SUVs considered light trucks are eligible for a maximum expensing allowance of $25,000 in the 2005 tax year, but the maximum first-year depreciation allowance in the same year for a passenger car under IRC section 280F is $2,960. As a result, a business taxpayer can realize a greater reduction in the after-tax cost of a vehicle by purchasing a heavy-duty SUV instead of a passenger car of comparable value.

The federal tax code also encourages the purchase of heavy-duty SUVs by excluding them from the gas guzzler excise tax. The tax is levied on domestic sales of new automobiles with relatively poor fuel economy ratings. It is paid by manufacturers and importers. All light trucks, including all SUVs, are exempt from the tax.

Several legislative proposals in the 109th Congress would curtail the tax preference for heavy-duty SUVs embedded in current depreciation rules. Specifically, four bills — H.R. 4384, H.R. 4409, S. 1852, and S. 2025 — would erase this preference by subjecting all SUVs with a gross weight of more than 6,000 pounds to 14,000 pounds to the annual depreciation limits for passenger cars under IRC section 280F. Two other bills — H.R. 2070 and S. 2345 — take an indirect approach to lessening this tax preference.

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Topics: Transportation, Energy

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