SUVs and Light Trucks Drive Off with Billions
Automakers are exploiting a gaping loophole in the federal tax code. Friends of the Earth believes that this loophole is contributing to the increased production and marketing of light trucks such as sport utility vehicles, minivans, and pickup trucks. The loophole allows automakers to avoid paying billions of dollars in taxes, and encourages the production of polluting, gas-guzzling, fuel-inefficient vehicles.
The gas-guzzler tax is a federal manufacturing excise tax collected by the Internal Revenue Service. The tax penalizes automakers for manufacturing inefficient vehicles sold in the US. However, due to an exemption, the tax does not apply to light- duty trucks and SUV's - even though they are often less fuel-efficient than other passenger vehicles. This loophole represents a mufti-billion dollar incentive for automakers to focus vehicle production and marketing on the most profitable light trucks, and sport utility vehicles (SUV's) and high-end pickup trucks.
This study finds that auto manufacturers avoided paying an estimated 10.2 billion in taxes on 1999 model-year light trucks and SUV's. In the past five years, automakers have avoided paying more than $43.1 billion in taxes. This figure will continue to increase as automakers promote SUV's to the consumer market. Although the technology exists to inexpensively improve these gas-guzzling light trucks, without a financial incentive such as the gas-guzzler tax, automakers will likely continue to build and promote inefficient, polluting vehicles. (Until gas prices go up and consumers won't buy them which is happening now!)
What is a Gas Guzzler and how is it Taxed?
In response to the energy crisis of the early 1970's, Congress enacted a federal gas.guzzler excise tax in 1978 to encourage automakers to improve the overall fuel efficiency of the vehicles offered to consumers. The tan essentially estblished established a fuel economy floor of 22.5 miles-per gallon, Passenger gallon. Passenger cars with a fuel economy below that floor are taxed.
The gas-guzzler tax was phased in over ten years with rates increasing over time, The tax applies only to manufacturers and importers of vehicles, although presumably some or all of the tax is passed along to automobile consumers in the form of higher prices. Only new vehicles are subject to the tax, so no tax is imposed on used car sales. The Internal Revenue service collects the tax quarterly from manufacturers and importers of vehicles.
The tax is graduated to apply a higher tax rate for less fuel-efficient vehicles. To determine the tax rate, manufacturers test all the vehicles at their laboratories for fuel economy, The U.S. environmental Protection Agency (ffA) confirms about 30 Percent of the tests at an EPA lab. Two separate fuel economy tests simulate city driving and highway driving. A weight average of city (55%) end highway (45%) fuel economies is used to determine the tax.
Corporate Average Fuel Economy (CAFE)
The gas-guzzler tax is not the only measure Congress has enacted to improve U.S. fuel economy.. In 1975, Congress passed National Corporate Average Fuel Economy (CAFE) standards. CAFE standards are completely separate from the gas-guzzler tax and require manufactures to maintain an average fuel economy of 27.5 miles per gallon for passenger cars and 20.7 miles per gallon for light trucks. Manufacturers face stiffer fines if their annual auto Fleet falls below CAFE standards.
A Loophole as Big as an SUV
Although the gas-guzzler tax has a simple purpose - to encourage the production of more efficient cars - the reality of its implementation is different. The tax does, indeed, apply to the most inefficient passenger care, mostly luxury sedans like Rolls-Royce's and Ford Crown Victories as well as high-performance sports cars like Jaguars and Ferraris. However, the federal gas-guzzler tax does not apply to the majority of the gas-guzzling vehicles being sold today: light-duty trucks like pickups and SUV's. When the tax was enacted, light trucks constituted only about 25 percent of new vehicle sales. Congress exempted this class] of vehicles to spare farmers and construction businesses. However, sales of SUVs and pickup trucks have grown rapidly, and now light trucks and SUV's make up about 50 percent of new vehicle purchases. These light trucks directly compete with passenger cars in the consumer market.
As SUVs and other light truck sales have grown in recent years, automakers have reaped huge profits. SUVs, minivans, and high-end pickups are being marketed to the broader consumer market as everyday passenger vehicles. vehicles once predominately used 20 haul cools and lumber are now more often used to haul kids and laptop computers. Auto industry analysts estimate that the profit margins on SUVs can range From $ 16,000 to $17,000 per vehicle. For example, Ford makes about 915,000 on each Excursion, the company's largest and least efficient SUV. Much of this profit can be attributed to the light truck exemption from the gas-guzzler tax. If Ford had to pay the appropriate tax on the Excursion, its profit margin would have been cut in half. If the gas-guzzler tax applied to other light-duty trucks, in 1999 automakers would have paid over 510 billion.
Profits over Efficiency
U.S. auto manufacturers gain the nose from the gas-guzzler tax exemption since large, inefficient vehicles are a specialty of American producers. In 1999, Ford Motor Company was the largest beneficiary, avoiding over $ 3.3 billion in taxes. General Motors also reaped huge rewards, skirting 33.3 billion in taxes on their SUVs and light trucks. Daimler--Chrysler benefited least among the Big Three, but still eluded a $ 2.8 billion tax bill.7-he tax exemption was worth about $800 million for ail the foreign automakers combined.
Among light trucks, Suv's would have incurred the greatest tax liability. If the federal gas puzzler tax applied to the over 3 million SUV's sold in U.S.. in 1999, the government would have collected about $5.6 billion. While the sale Of pickups was high in 1999, the potential gas-guzzler revenues from these vehicles would have been markedly lower than SUVs - $3.9 billion .This is because pickups tend to have better fuel economy than SUVs. Vans and minivans would have incurred a gas-guzzler tax liability of only $811 million,
While SUVs are the biggest and most polluting of the light trucks, automakers have benefited the most from the tax exemption on pickup trucks over the years. Until recent]recently, the average gas-guzzler tax on pickup trucks would have been much higher than the average tax on SUV's. In fact, the average gas-guzzler tax on eligible pickup trucks was close to twice as much as the average for SUVs in 1996. Recently, pickups have apparently been gutting more fuel-efficient, while many SUVs are getting less fuel efficient. Vans and minivans have been getting steadily more fuel efficient since the mid-1990s.
Why Tax Gas Guzzlers?
In 1998, the most recent year for which the IRS data has been compiled, the actual gas-guzzler tax on passenger automobiles raised only $48 million. That's because it works!
Automakers have an incentive to make their vehicles more fuel-efficient to avoid the tax. After being phased in, the gas-guzzler tax receipts increased steadily until 1992 when revenues reached $144 million. Revenues from the gas-guzzler tax
have been declining on passenger cars ever since 1992, because the tax successfully deterred manufacturers from producing inefficient passenger cars. Most of the car models that continue to pay a gas-guzzler tax are the ultra-high
performance sedans, coupes, and sports cars such as Austin Martins, Lamborginis, and Ferraris. Gas guzzlers are not taxed to raise revenues for the government, but to persuade automakers to address the serious environmental and energy problems posed by automobilies, namely air pollution and oil dependence.
Problem: Air Pollution
Despite years of improving air quality in many areas, air pollution continues to create serious environmental and health problems. The US. Environmental Protection Agency estimates that more than 92 million Americans still breathe unhealthy air, especially in urban areas. Currently motor vehicles -- passenger cars and trucks -- produce about 30 percent of the smog-forming emissions nationwide motor vehides are also the largest source of air pollutants. In addition to the serious health risks associated with motor vehicle emissions, production of carbon dioxIdc (C02) threatens potentialy huge changes to the gobal climate. Motor vehicles account for 20 percent of U.S. CO2 emissions, and transportation as a whole is the fastest growing sector for carbon dioxide emissions.
A recent study by the Union of Concerned Scientists (USC), "Greener SUVs; A Blueprint for Cleaner More Efficient Light Trucks," found that for $700, modest modifications to a Ford Explorer could increase its fuel economy by nearly 50 percent - from 19.3 mpg to 28.4 mpg. For an aditional $200, UCS found ways to iimprove fuel economy 75 percent, to 34.1 mpg. For the highest investment of $3,400,UCS could iimprove the Explorer's fuel economy by 126 percent-43.7 mpg. By comparison, if the gas-guzzler tax applied to the Explorer, Ford would have to pay $2,100 for each vehicle.
Problem: Oil Dependence
The U. S, has imported foreign oil to supplement domestic production for decades. Over time, our dependence on foreign oil has grown. Today, the U.S. imports a majority of the oil we use. Many analysts believe this dependence on foreign oil is a threat to national security, enabling oil-producing countries to damage the U.S. economy by restricting the supply of crude oil, and potentially requiring military intervention to secure oil flows.
Our country can reduce its dependence on foreign oil by increasing domestic supply by reducing domestic demand. Based on the best estimates of domestic oil reserves, increasing domestic supply can, at best, result in short-term improvement of our oil dependence. Reducing our consumption is a more effective and less expensive long-term solution. improving the fuel economy of light trucks is a critical piece of reducing demand for oil.
Friends of the Earth estimates that if automakers improved efficiency all of the gas-guzzling light trucks and SUV's to avoid the tax, consumers of those vehicles would save 490 million gallons of gas annually. At current fuel prices ($1.66 per gallon), that would translate into about $813 million saved by vehicle owners at the gas pump. These savings would apply for each year of improved light trucks on the road. Therefore the biggest benefit will be long-term as the annual fuel savings cumulatively build up. After ten years of selling more fuel-efficient light trucks and SUV's, the annual gas savings would reach about 5 billion gallons or about a 3 percent reduction in the entire U.S. demand for gasoline. Such a drop in demand could have an impact on the price of gasoline and translate into additional fuel cost savings for all consumers.
The intensive marketing of gas-guzzling light trucks and SUV's as passenger vehicles contradicts efforts to control air pollution and mitigate its health and environmental degradation.The large profit margin on light trucks, combined with the value of the gas-guzzler tax loophole, provide clear economic reasons for automakers to maximize their sales of light trucks. Since the majority of motor vehicles are purchased for personal use, it is not surprising that auto manufacturers have pursued an intense marketing effort to convert the image of these traditional commercial and work vehicles into the new family gas guzzling wagons.
The success of automakers in their marketing efforts has caused the environrmental impacts of SUV's to increase in two different ways. Frist, the number of these gas-guzzling light tucks and SUV's being sold continues to rise, creating a significant shift to gas guzzlers and fuel shortages. Second, as the ownership of these vehicles shift from commercial users to personal users, with the average use is growing. So they drive more miles on average and guzzle more gas driving up gas prices.
The gas-guzzlcr tax exemption for light trucks should be eliminated. This would level the playing field within the automotive market and provide tremendous financial incentives for autvmakera to improve the fuel efficiency of their light trucks and SUVs. The technology exists for automekers to significantly improve the fuel efficiency of these light trucks with little or no reduction in performance or increase in price. If farmers and small businesses require protection from paying the full costs of these inefficient but necessary vehicles, several other mechanisms could provide such relief without subs!„ dining SUVs and pickup ducks purchased far typical consumer use. IF the light truck exemption was removed from the gas-guzzler tax, then automakers would have two options: lntprvve fuel efficiency or pay the tax. Past experience with passenger cars suggests that the gas-guzzler tax is a strong .. enough incentive for avtomakers to improve fuel efficiency in an effort to avoid or at least minimize their tax liability. However, if autvmakers choose to pay a[l or some of the tax for light mucks, then the increased government revenues from the gas-guzzler tax could he applied in a number of ways to improve fuel efficiency. For example, tine government could provide tax credits to automakers for achieving an average fuel economy above the CAFE standards. Or the government could gi.e consumers a tax credit far purchasing fuel-efficient vehicles.
Credit and Contact Information
This report was made possible by the generous support of the Energy Foundation.
Most of the data used in this report was collected from National Highway Traffic and Safety Administration databases.
Written by Sean Moulton with contributions from Brian Dunkiel, David Hirsch, Gawain
Kripke, and Erich Pica, Design,and layout by Annette Price, Graphic Designer.
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