Legislative activity by the 108 th Congress expanded the scope of debate to include the ways in which federal tax policy affects the demand for heavy-duty SUVs. In passing the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA, P.L. The provision made the expensing allowance under section 179 of the Internal Revenue Code (IRC) more generous in 2003 through 2005. This report examines how the federal tax code treats the purchase of heavy-duty SUVs for business use and discusses proposals in the 109 th Congress that would further change this treatment. The enormous growth in domestic ownership of SUVs since the early 1990s has fueled a lively debate over their effects on highway safety, air quality, and U.S. reliance on foreign sources of crude oil and petroleum products, among other concerns. Depreciation of Motor Vehicles Under the Federal Tax Code

A logical starting point for an examination of how the federal tax code affects the purchase of heavy-duty SUVs is the tax treatment of depreciation for motor vehicles in general and passenger cars in particular. Although the depreciation of motor vehicles in general is governed by the rules of the MACRS and the expensing allowance, the cost of so-called luxury passenger cars used primarily for business is recovered under a different set of rules. SUVs, trucks, vans, and minivans built on a truck chassis with a gross vehicle weight of more than 6,000 pounds are considered light trucks for tax purposes and thus exempt from the depreciation limitations for luxury passenger cars under IRC section 280F. It can be seen in a comparison of the maximum first-year depreciation deductions and the present value of total depreciation allowances (in 2005 dollars)—and the present value of the tax savings associated with these allowances—a non-corporate business taxpayer is allowed to claim as a result of placing in service in 2005 a new SUV weighing over 6,000 pounds but not more than 14,000 pounds, or a new passenger car of equal value. After all, AJCA reduced the maximum expensing allowance for heavy-duty SUVs from over $100,000 to $25,000. Gas Guzzler Excise Tax

The tax treatment of depreciation for heavy-duty SUVs is not the only way in which the federal tax code encourages the purchase of these vehicles. It applies to domestic sales of automobiles by manufacturers and importers, who are required to pay the tax. Legislative Initiatives in the 109th Congress to Curtail or Eliminate SUV Tax Preferences

Several bills to curtail—directly and indirectly—current tax preferences for heavy-duty SUVs have been introduced in the 109 th Congress. Four such bills would erase the tax preference for heavy-duty SUVs in current depreciation rules by subjecting all SUVs with a gross weight of over 6,000 pounds to 14,000 pounds to the annual depreciation limits for passenger cars under IRC section 280F. The bills are H.R. H.R. By contrast, H.R. 4409 , S. 1852 , and S. 2025 appear to contain no such exclusion, but they would exempt "vehicles used in a farming business" from the depreciation limits.
The surge in domestic popularity of large sport utility vehicles (SUVs) since the early 1990s has stirred a debate over what steps the federal government should take, if any, to mitigate their effects on the environment, highway safety, traffic congestion, and U.S. dependence on foreign sources of oil. Legislative activity in the 108th Congress expanded the scope of the debate to include the ways in which the federal tax code encourages the purchase of heavy-duty SUVs, primarily for business use. In May 2003, Congress passed a measure (the Jobs and Growth Tax Relief Reconciliation Act of 2003) that raised the maximum expensing allowance under section 179 of the Internal Revenue Code (IRC) for these vehicles to $100,000 from May 2003 through the end of 2005; the American Jobs Creation Act of 2004 lowered the allowance to $25,000, as of October 22, 2004.
This report examines current federal tax preferences for SUVs and legislation in the 109th Congress that would alter them. It will be updated to reflect subsequent legislative activity addressing the preferences.
One way in which the federal tax code can influence the purchase of heavy-duty SUVs for business use is through the tax treatment of depreciation for these vehicles. Under current tax law, the depreciation of passenger cars is treated less generously than that of light trucks (including many SUVs). Passenger cars, which are defined as motor vehicles weighing 6,000 pounds or less, are considered so-called listed property—and thus subject to annual limits on depreciation allowances. By contrast, light trucks, which are defined as motor vehicles weighing more than 6,000 pounds (with some exceptions), are generally depreciated under a different and more favorable set of rules. For example, SUVs considered light trucks are eligible for a maximum expensing allowance of $25,000 in the 2005 tax year, but the maximum first-year depreciation allowance in the same year for a passenger car under IRC section 280F is $2,960. As a result, a business taxpayer can realize a greater reduction in the after-tax cost of a vehicle by purchasing a heavy-duty SUV instead of a passenger car of comparable value.
The federal tax code also encourages the purchase of heavy-duty SUVs by excluding them from the gas guzzler excise tax. The tax is levied on domestic sales of new automobiles with relatively poor fuel economy ratings. It is paid by manufacturers and importers. All light trucks, including all SUVs, are exempt from the tax.
Several legislative proposals in the 109th Congress would curtail the tax preference for heavy-duty SUVs embedded in current depreciation rules. Specifically, four bills—H.R. 4384, H.R. 4409, S. 1852, and S. 2025—would erase this preference by subjecting all SUVs with a gross weight of more than 6,000 pounds to 14,000 pounds to the annual depreciation limits for passenger cars under IRC section 280F. Two other bills—H.R. 2070 and S. 2345—take an indirect approach to lessening this tax preference.