AUTO ECONOMICS

June 2005

It is impossible to pull into a parking lot and view the invasion of SUVs and not conclude that we all follow the pack. Is it simply nuts to own these behemoths when it costs over fifty dollars each time to fill up your SUV type vehicle?  I know you got that big tax deduction last year (but let’s try to forget you deducted your family vehicle as a business deduction).  Well, the latest new and hot vehicles are non-conventional autos and it has a tax deduction as well. Before jumping in, let’s look at the economics of non conventional vehicle.   

There are two types of non-conventional autos: 

• The electric car, truck or van uses grid electricity to recharge the engine – this type is eligible for a $4,000 tax credit.  The problem is that the inconvenience of re-charging the battery has severely restricted their popularity and availability, so they are out.
• Second, the hybrid vehicle which doesn’t need to be plugged in – instead it draws power from two energy sources, typically a gas engine combined with an electric motor.  Surplus engine power is used to continually recharge the vehicle’s battery.  The hybrid qualifies for a $2,000 tax deduction in the year of purchase.

Hybrids have racked up record sales since early 2003 and industry experts expect hybrid sales to continue accelerating sharply in the next few years – to 200,000 in 2005, 260,000 in 2006 and 535,000 in 2011.  The reason?  A flurry of new hybrid models, including pickup trucks and SUV’s.  The eleven hybrid models available this year will grow to nearly 40 by the end of the decade. Hybrids are good for the earth because they suck up less gas and spit out less pollution.  But being an environmental trailblazer isn’t cheap.  The hybrids available today cost from $3,500 to $6,000 more than comparable conventional cars.

OK – how do the higher cost, the better fuel efficiency and the tax credit translate into an economic decision?  Let’s start by comparing the gas costs of driving a $20,000 Civic hybrid with a $15,600 Civic LX.   The hybrid gets 48 mpg in the city and 47 mpg on the highway.  The Civic LX gets 36 mpg in the city and 44 mpg on the highway.  Using city mileage and $2.20 per gallon for gas, let’s assume you drive 15,000 miles every year.  Driving the hybrid will trim your fuel costs by about $230 a year.  After 10 years, you’d save $2,280.  You would not recapture your $4,400 purchase cost differential for 19 years!  Even if gas prices shoot up to $3 a gallon, it would still take 14 years to recoup the higher cost of the hybrid.

Now let’s factor in the tax deduction, remembering that this is a one-time event in the year of purchase.  (Plus, the credit is only available on a new hybrid, so a pre-owned Civic hybrid won’t save you on your taxes.)  Let’s say you are in the 35% tax bracket:  your $2,000 deduction would save you another $700 in the first year.  Your years to recoup the purchase cost differential would drop to 15 years at $2.20 per gallon and 12 1/2 years at $3 per gallon.

So, the bottom line is:  unless you plan to own your hybrid forever, buy one for the environment, not for your pocketbook.  For more information on financial planning and on a wide variety of subjects, contact Cover & Rossiter at (302) 656 6632.