In this Emerging Issues Commentary, Gail H. Morse and Alexandra E. Dowling of Jenner & Block’s Chicago office discuss federal and state tax incentives for fuel efficient and alternative fuel vehicles. They also examine the prospective efficacy of such tax incentives. Ms. Morse and Ms. Dowling conclude with some practice pointers, proposing, for example, that the alternative fuels industry encourage Congress to increase investment in alternative fuel projects. Note that this article is a companion piece to the authors earlier commentary, entitled Federal and State Tax Incentives for Renewable Energy, 2008 Emerging Issues 221, which reviewed tax incentives for the fossil fuel industry.

“Today, the tax code has made little progress in keeping up with technology or the demand for alternatives to fossil fuel and fossil fuel burning vehicles,” the authors write.  “Since their introduction 30 years ago, federal income tax provisions for alternative fuels have not been meaningfully updated to compete with the tax incentives provided to fossil fuels. . . .

“Given the recent focus on the increasing cost of oil and carbon dioxide emissions . . . there has been increasing demand for finding a replacement for fossil fuels and fossil fuel burning vehicles,” Ms. Morse and Ms. Dowling say.  “Most commentators agree that without significantly increasing the federal and state tax benefits for the types of alternative fuels that are the most promising alternative sources (or reducing existing tax benefits for fossil fuels), thereby encouraging significant research and investment in alternative fuels, alternative fuels are unlikely to overcome the incentives provided to fossil fuel production.”

They describe the federal and state tax incentives for fuel efficient and alternative fuel vehicles and the prospective efficacy of such incentives, and note that alcohol fuels represent a small share of the overall market and have not significantly affected U.S. energy independence or energy security, nor have they had significant positive environmental effects.

“The efficacy of the incentives is challenged by the fact that not all alternative fuels are viable alternatives to gasoline and diesel,” Ms. Morse and Ms. Dowling write.  “Ethanol (the second-most consumed alternative fuel) is not an environmentally-friendly alternative to fossil fuel because the production of ethanol creates emissions that are reported to be more polluting than those produced by conventional fuels. . . .  Compressed natural gas is domestically produced and has lower emissions than gasoline, although the fuel (and prices) are still tied in to traditional fossil fuels.

In addition, the authors note that there are aspects of the current tax incentive structure that may undercut the potential benefit. 

Subscribers to www.lexis.com may read much more about this issue by purchasing Ms. Morse and Ms. Dowling’s entire expert commentary at Jenner & Block: Federal and State Tax Incentives for Alternative Vehicles and Fuels.