The 'light-truck' loophole
© St. Petersburg Times
published February 4, 2003
Imagine if wealthy business owners were actually rewarded for buying the largest, most inefficient SUVs by allowing them to deduct more than half the sticker price from their taxes. Actually, you don't have to make up that scenario, because it's an existing loophole that cost the government about $1-billion in tax revenues last year.
Rather than trying to close the loophole, the Bush administration has initially proposed to make it larger. Instead of an immediate $25,000 deduction plus depreciation that the law now allows, the administration would triple the amount to $75,000. So a small-business owner (including some doctors and lawyers) who bought a Hummer H1 for $102,581 would, under the proposed rule, be allowed to deduct a total of $87,135 (including depreciation) from the cost. That would translate to a tax savings of $33,634 for someone in the 38.6-percent tax bracket, according to an analysis by the New York Times.
Here's the kicker. To be eligible for the immediate deduction, the SUV has to be a behemoth like the Hummer, weighing more than 6,000 pounds. No lightweight, fuel-efficient vehicles need apply.
At a time when gas prices are rising and war is on the horizon, such a giveaway was a little much even for the consumption-oriented administration.
Dr. John Graham, with the Office of Management and Budget, said the administration was willing to rethink the $75,000 deduction. "We have an open mind about whether the deduction for cars needs to be refined," he said.
Tinkering won't fix this loophole, which needs to be closed. "Before, (the loophole) was large enough to drive a small SUV through," said David Friedman, an engineer at the Union of Concerned Scientists. "Now, it's large enough to drive a Hummer through."
The loophole is an unintended consequence of tax policy that helps business owners depreciate their trucks the same as other equipment. The problem is that the government also allows automakers to classify their largest SUVs as "light trucks" so they can ignore the mileage requirements put on cars.
It didn't take long for tax advisers and car dealers to take advantage of the loophole, even though their target audience is more interested in the tax deduction than in hauling freight. Here's the advice one accountant gave his online readers: "If you are a small business owner in the market for a business vehicle, looking for a substantial tax break, or both, a heavy sport utility vehicle may be for you."
This is not only bad tax policy but bad energy policy, as well. The "trucks" eligible for the deduction are the most wasteful. The Hummer, for example, weighs 7,000 lbs. and gets 8 miles-per-gallon. Apparently, the Bush administration is reconsidering the $75,000 deduction because it seems counterproductive to another of its policies to seek minor improvements in SUV fuel economy.
The best way to close this loophole is to remove the "light truck" designation for SUVs. But that is not likely to happen because of heavy lobbying from the Big 3 automakers and unions. So rather than rethinking the $75,000 deduction for heavy vehicles, the Bush administration should do away with the deduction entirely. They should find a way to reward small business owners who buy fuel-efficient vehicles.
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