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Washington Watch

The Dumbest Tax Policy Ever? (cont'd)

We've Reported Before on the Hybrid Tax Credit That Becomes Unavailable Over Time

Well, The Time Has Come

The federal government decided to incent car buyers to purchase hybrids by providing these cars with a tax credit (not a deduction, but a direct tax subsidy).

This sound policy is undermined, however, by phasing out the tax credit when there are more than 65,000 sales of a given model. Well, the most popular hybrid, Toyota's Prius has reached that level. The tax credit for Prius driviers has dropped in half, from $3,150 to $1,575 and is projected to drop again next spring to $787.50.

So, Toyota purchasers are punished for their desire to purchase the car of their choice. Is this the way the market is supposed to work? Meanwhile, 65,000 is no magic number for sales. Car manufacturers are generally looking for mass market cars to sell 250,000 units before they are considered "winners" and have a firm spot on the product list. The Prius, while increasingly popular, still has a ways to go and could use the tax break. (BTW, all Toyota models have reached their initial limits and have lost 50% of their full tax credit.)

The largest tax credit is now provided to Ford Escape buyers ($2,600), followed by purchasers of the Honda Civic ($2,100).