Other tax instruments

• US
• China
• EU
• India
• Mexico
• Canada
• South Africa

Countries use a variety of tax instruments to promote and incentivise more fuel efficient vehicles. Some taxes are based on engine displacement, others are based on the level of CO2 emitted, the age of the vehicle, or the mileage a vehicle gets.

Taxes can act as a an extra cost to the purchase price of a vehicle in the case of large, inefficient vehicles, whereas other tax instruments act as a financial incentive for consumers to purchase fuel efficient models – e.g. in the case where rebates are provided for certain vehicles.

Below are examples of different tax instruments countries use to incentivize or penalize the purchase of certain vehicles.

U.S.

The U.S. imposed a tax called the “Gas Guzzler Tax”, based on a law entitled the Energy Tax Act. This law applied a tax to vehicles that achieved less than a specified fuel economy rating, i.e. 22.5 mpg combined city and highway rating. This tax goes from $1,000 for a vehicle that achieves at least 21.5 mpg up to $7,000 for a vehicle that gets 12.5 mpg. Below is a chart of the current tax structure in the U.S.

The IRS collects the tax directly from the manufacturer or importer of the vehicles. The following table shows the gas guzzler tax rates which have been in effect since January 1, 1991. The manufacturer or importer must pay this amount for each vehicle that does not meet the minimum fuel economy level of 22.5 mpg. This tax only applies to passenger cars.

Combined fuel economy of:	Amount
at least 22.5 mpg	No tax
at least 21.5, but less than 22.5 mpg	$1000
at least 20.5, but less than 21.5 mpg	$1600
at least 19.5, but less than 20.5 mpg	$1700
at least 18.5, but less than 19.5 mpg	$2100
at least 17.5, but less than 18.5 mpg	$2600
at least 16.5, but less than 17.5 mpg	$3000
at least 15.5, but less than 16.5 mpg	$3700
at least 14.5, but less than 15.5 mpg	$4500
at least 13.5, but less than 14.5 mpg	$5400
at least 12.5, but less than 13.5 mpg	$6400
less than 12.5 mpg	$7700

 

 

 

 

 

 

 

 

 

The purchase of hybrid electric cars qualifies for a federal income tax credit up to $3,400 on the purchaser's Federal income taxes. The tax credit is to be phased out two calendar quarters after the manufacturer reaches 60,000 new cars sold in the following manner: it will be reduced to 50% if delivered in either the third or fourth quarter after the threshold is reached, to 25% in the fifth and sixth quarters, and 0% thereafter.

As of April 2010 three auto manufactures have reached the 60,000 cap, Toyota Motor Company reached it in 2007, Honda in 2008, and as of April 1, 2010, all Ford Motor Company hybrid vehicles are also no longer eligible for this tax credit. Vehicles purchased after December 31, 2010 are not eligible for this credit as this benefit will expire on this date.

China

China has recently revised its taxation of motor vehicles to strengthen incentives for the sale and purchase of vehicles with smaller engines. The taxation has two components: an excise tax levied on automakers and a sales tax levied on consumers.

The excise tax rates are based on engine displacement. In 2006, the Chinese government updated excise tax rates to further encourage the manufacture of smaller-engine vehicles. Specifically, the tax rate on small-engine (1.0-1.5 liter) vehicles was cut from 5 to 3 percent, while the tax rate on vehicles with larger-engines (more than 4 liters) was raised from 8 to 20 percent.

Also, as the preferential 5 percent tax rate that applied to SUVs has been eliminated, all SUVs are now subject to the same tax schedule as other vehicles with the same engine displacement.

EU

Many of the EU countries have various tax schemes in place to encourage the purchase of low CO2 emitting vehicles. These are laid out in detail in the EU Case Study, available here.

India

The national excise duty has been crafted to give an advantage to small cars - 12% excise on small cars and 24% on bigger cars and SUVs.

However, the flaw in the current tax scheme is that the small car segment has been defined as a car of length not exceeding 4,000 mm and with an engine capacity not exceeding 1,200 cc for petrol cars and 1,500 cc for diesel cars. The more relaxed limit for diesel cars has brought within its net a large number of mid-segment diesel cars to qualify for the tax cut. This has created an incentive for small diesel cars when clean diesel fuel and technologies are not yet widely available in India.

The Air Ambience Fund has been created by the Finance Department through an office memorandum dated March 27, 2008. An Air Ambience Fund account has been opened in the Delhi Pollution Control Committee (DPCC).

The first scheme that is to be funded from the Air Ambience Fund is the program to give a subsidy to battery-operated vehicles. This will help to promote zero emissions vehicles in the city. The Delhi government has decided to extend relief to the tune of 30 per cent of costs to those opting for battery-operated vehicles. Prospective buyers of these vehicles will get 15 per cent subsidy and 12.5 per cent VAT reimbursement. In addition, the registration charge and one-time road tax levied at the time of registration will also get reimbursed. This scheme started in 2008 is funded entirely under the Air Ambience Fund.

Mexico

Mexico's vehicle owners could soon be paying higher taxes on larger and older vehicles — but getting exemptions from use taxes if they drive hybrids — under a bill submitted to the Mexican Congress by the Partido Verde Ecologista, or Mexican Green Party.

The proposal asks for exemptions on 2009 hybrid vehicles, and not only would these green cars evade this tax, but they would also be exempt from the general 15 percent consumption tax. The reform, if approved by Congress, would decisively promote green technologies in motor vehicles and could reduce domestic consumption of oil resources.

Canada

Canada has a program that taxes less efficient vehicles. This tax is on fuel-inefficient vehicles from C$1,000 to C$4,000 in its Green Levy program. The Green Levy imposes a tax that starts at C$1,000 for vehicles which use between 13 L/100km and 14 L/100km and proceeds in $1,000 steps for every liter increase in consumption up to 16 L/100km. At that point, the tax is capped: all vehicles that use 16 L/100km or more are subject to the same maximum $4,000 tax.

South Africa

South Africa has established an ad valorem emission tax rate based on CO2 emissions. The tax rate is shown in the table below

CO2  (g/km)	CO2 Tax Rate
100	0.0%
110	0.0%
120	0.0%
140	1.3%
160	2.7%
180	4.0%
200	5.3%
220	6.7%
240	8.0%
260	9.3%
280	10.7%
300	12.0%