Pending Energy Legislation – Making Tax Incentives Work for Government Fleets

WASHINGTON - The U.S. Congress is considering comprehensive energy legislation that is expected to include tax incentives to encourage the purchase and use of alternative fuel and advanced technology vehicles, according to the National Association of Fleet Administrators (NAFA).

Federal tax incentives are intended to encourage the acquisition of AFVs and hybrids by helping to reduce the upfront additional cost of these vehicles. As tax-exempt entities, however, government agencies and other nonprofits are not able to take advantage of these tax incentives.

Many government and nonprofit fleets are in a unique position to lead the way in promoting the use of alternative fuel and hybrid vehicles by virtue of being centrally refueled and operating in urban areas. According to NAFA, it is a serious flaw in our energy policy that they are expected to bear the substantial incremental costs associated with adopting new technologies because they are left out of the tax incentive mix.

NAFA is asking congressional leaders to consider allowing government and nonprofit entities to claim the tax incentive as a credit against federal payroll tax liability. Such a credit would be applied against the employer payroll taxes (e.g., federal income tax withholding) remitted to the U.S. Treasury.

What You Can Do – Action Items

1. Attached is a draft letter NAFA will be sending to key Senators and Representatives from NAFA Members. Please review the letter and return the response form at the end of the draft letter if we may add your name and agency/city/county/town to the letter. If you have any questions, please call Pat O’Connor, NAFA’s Legislative Counsel at (202) 223-6222.

2. Recommend that your agency or employer send a similar letter to Senators and Representatives.

3. Bring legislation to the attention of your agency or employer. A description of the proposal is attached.

4. Suggest that this issue be brought to the attention of other organizations, such as the National League of Cities, National Association of Counties, etc.

If you should have additional questions, please contact Phil Russo, executive director of NAFA. His e-mail address is prusso@nafa.org.

DRAFT
The following letter will be sent to key Senators and Representatives. NAFA public fleet members are invited to add their names to the letter.

Dear Representative/Senator:

As energy legislation is considered, we are writing to respectfully request that you consider legislation that would allow government and nonprofit vehicle fleets to take advantage of federal tax credits for alternative fuel and hybrid vehicles.

Hybrid and alternative fuel vehicle (AFV) technologies can reduce emissions while increasing fuel economy in vehicles. However, as with any new technology, the low volumes at which the vehicles are currently produced lead to higher prices than the pure business case can fully support. Because of the higher cost, federal energy tax policy has been used to provide incentives, including tax credits, to reduce the upfront cost and assist fleet operators to make the financial case to acquire these vehicles.

Yet, important as they are, these incentives are not, as a practical matter, available to a large and important segment of vehicle users who are tax-exempt: government and nonprofit fleets. This includes state and local government fleets, federal agency fleets and nonprofit organizations, such as public utilities or universities.

Many government and nonprofit fleets are in a unique position to lead the way in promoting the use of alternative fuel and hybrid vehicles by virtue of being centrally refueled and operating in urban areas. It is a serious flaw in our energy policy that they are expected to bear the substantial incremental costs associated with adopting new technologies because they are left out of the tax incentive mix.

The Energy Policy Act of 2005 recognized that the purpose of energy tax incentives is to encourage the commercialization of AFVs and hybrid vehicles, without regard to whom the purchaser might be – a consumer, a corporation or a government agency. It attempted to include tax-exempt government and nonprofit entities by allowing the seller to claim the credit and then pass the savings along to the purchaser, provided certain conditions are met. Although well-intended, this approach has not worked in actual practice. The seller often does not have the necessary tax liability to claim the credits for sales of hybrids. Moreover, whether the credit can be used is not certain at the time of sale – therefore it is rarely rebated to the purchaser.

The legislative solution we ask you to consider is to allow government or nonprofit fleets to claim the energy tax credit against the entity’s payroll tax liability. With this legislation, alternative fuel vehicles will be more affordable for state, local and federal fleets, as well as nonprofit entities. This in turn will allow government and nonprofit fleets to be in the forefront of a robust movement to multiply the number of alternative fuel and hybrid vehicles on this nation’s roadways and to help proliferate and sustain alternative fuel infrastructure.

If you should have any questions or need additional information, please contact Patrick O’Connor, Legislative Counsel for the National Association of Fleet Administrators, at (202) 223-6222.

Thank you for your consideration.

Sincerely,

NAMES of NAFA PUBLIC FLEET MEMBERS

Action Item

If you would like your employer to be added as a signer to NAFA’s letter, please provide the following information and fax or email to NAFA’s U.S. Legislative Counsel Pat O’Connor.

1. Name:

2. Title:

3. Full Name of Agency:

Fax: 202/785-0687

Email: patoconnor@kentoconnor.com

Alternative Fuel and Hybrid Vehicle Tax Credits Government and Nonprofit Fleets:

Background
Hybrid and alternative fuel vehicle (AFV) technologies can both reduce emissions while increasing fuel economy in vehicles. However, as with any new technology, the low volumes at which the vehicles are currently produced lead to higher prices than the pure business case can fully support. Because of the higher cost, federal energy tax policy has been used to provide incentives, including tax credits, to reduce the upfront cost and assist fleet operators to make the financial case to acquire these vehicles.

Yet, important as they are, these incentives are not, as a practical matter, available to a large and important segment of vehicle users who are tax-exempt: government and nonprofit fleets. This includes state and local government fleets, federal agency fleets and nonprofit organizations, such as public utilities or universities.

Many government and nonprofit fleets are in a unique position to lead the way in promoting the use of alternative fuel and hybrid vehicles by virtue of being centrally refueled and operating in urban areas. It is a serious flaw in our energy policy that they are expected to bear the substantial incremental costs associated with adopting new technologies because they are left out of the tax incentive mix.

The Energy Policy Act of 2005 recognized that the purpose of energy tax incentives is to encourage the commercialization of AFVs and hybrid vehicles, without regard to whom the purchaser might be – a consumer, a corporation or a government agency. It attempted to include tax-exempt government and nonprofit entities by allowing the seller to claim the credit and then pass the savings along to the purchaser, provided certain conditions are met. Although well-intended, this approach has not worked in actual practice. The seller often does not have the necessary tax liability to claim the credits for sales of hybrids. Moreover, whether the credit can be used is not certain at the time of sale – therefore it is rarely rebated to the purchaser.

Solution
A legislative solution is to allow government or nonprofit fleets to claim the energy tax credit against the entity’s payroll tax liability. With this legislation, alternative fuel vehicles will be more affordable for state, local and federal fleets, as well as nonprofit entities. This in turn will allow government and nonprofit fleets to be in the forefront of a robust movement to multiply the number of alternative fuel and hybrid vehicles on this nation’s roadways and to help proliferate and sustain alternative fuel infrastructure.

Proposed Legislative Language
`(e) Special Rule for Certain Tax-Exempt Entities-

(1) IN GENERAL- In the case of an eligible taxpayer which is exempt from tax under this chapter, the aggregate credits allowed to the eligible taxpayer under subpart C shall be increased by the lesser of--

`(A) the credit which would be allowed under this section without regard to this subsection, or

`(B) the amount of the payroll taxes imposed on the eligible taxpayer during the calendar year in which the taxable year begins.

“(2) ELIGIBLE TAXPAYER. --- For purposes of this subsection, the term ‘eligible taxpayer’ means a taxpayer which is –

“(A) a State or political subdivision thereof, the District of Columbia, a possession of the United States, or an agency or instrumentality of any of the foregoing, or

“(B) any organization described in section 501(c) of the Internal Revenue Code of 1986 which is exempt from taxation under section 501(a) of such code.

`(3) PAYROLL TAXES- For purposes of this subsection--

`(A) IN GENERAL- The term `payroll taxes' means the taxes imposed by—

`(i) section 3111, and

`(ii) sections 3211(a) and 3221(a) (determined at a rate equal to the rates under section 3111).

`(B) SPECIAL RULE- A rule similar to the rule of section 24(d)(2)(C) shall apply for purposes of subparagraph (A).'.