The government uses all types of methodology to modify our behavior. While many look for nefarious conspiracies and such, the government usually does it right before our eyes. The most obvious area of behavior modification is with taxes. In this case, the government has made an effort to boost energy conservation by giving us massive financial incentives to purchase hybrid vehicles. The incentives come in the form of tax credits.



A tax credit is the golden egg of taxes. Whereas a tax deduction, such as the mortgage interest deduction, is used to lower the adjusted gross income you will have to use to figure out the amount you owe off the tax tables, tax credits get right to the heart of the matter. You see, tax credits are deducted dollar for dollar from the amount of tax you owe. If you figure out your adjusted gross income, go to the tax tables and then figure out you owe $8,000 for the year, the tax credit is then subtracted from this amount. Golden egg, indeed.

In the case of hybrids, the government wants to motivate us to buy them, but only to a certain extent. The government is more or less trying to make them an acceptable part of our society, not give them a free ride forever. As a result, the tax credits applicable to the purchase of hybrids phase out after certain sales goals are met. Specifically, the tax credits start being reduced once a manufacture sells 60,000 hybrid vehicles. The IRS reviews the sales number each quarter to keep a tab on how the manufacturers are doing.

In the case of Toyota, the IRS has determined that the company reached the 60,000 mark this last quarter. Specifically, it hit the mark in May. As a result, the tax credit that can be claimed for buying a Toyota hybrid will begin to be phased out. Beginning in October 2006, the tax credit for each model of Toyota and Lexus [owned by Toyota], will be reduced by a whopping 50 percent. In April of 2007, the credits will be cut again, this time to 25 percent of the original credit amount. In October of 2007, the credit will be terminated completely. The tax credit amount is determined by vehicle, so you will have to determine the equivalent cut for the model you are interested in.

If you have been paying attention to the dates, you may have noticed something interesting. The reduction for the Toyota hybrid tax credit does not happen immediately. You can still go out today, purchase a Toyota hybrid and claim the full tax credit. Once we roll into October 2006, that will no longer be the case.