The Bush administration's economic plan would increase by 50 percent or more the deductions that small-business owners can take right away on the biggest sport utility vehicles and pickups.
The plan would mean small businesses could immediately deduct the entire price of S.U.V.'s like the Hummer H2, the Lincoln Navigator and the Toyota Land Cruiser, even if the vehicles were loaded with every available option. Or a business owner, taking full advantage, could buy a BMW X5 sport utility vehicle for a few hundred dollars more than a Pontiac Bonneville sedan, after the immediate tax deductions were factored in.
Tax experts and environmentalists say the plan would provide incentives for businesses to choose the biggest gas-guzzling trucks because it takes several years to depreciate the cost of passenger cars and smaller sport utility vehicles. The ramifications of the Bush plan on S.U.V. buyers were reported today in The Detroit News.
The potential lift for sales of big S.U.V.'s comes amid rising tension in the Middle East and increasing criticism of S.U.V.'s from environmentalists and regulators.
But a top budget official said today that the administration might be open to changes in the tax code that would bring cars more in line with big trucks.
"We have an open mind about whether the deduction for cars needs to be refined," said Dr. John Graham, the administrator of the Office of Information and Regulatory Affairs in the Office of Management and Budget.
The tax code now caps deductions for most automobiles. But the largest vehicles those that weigh more than 6,000 pounds fully loaded are exempt because the relevant portion of the code was written in the 1980's, before the rise of the sport utility vehicle, and was intended to exempt big pickups needed on work sites. Now the tax incentives also give business owners not involved in hauling doctors, real estate agents, accountants more incentive to buy the biggest S.U.V.'s instead of smaller ones, or cars.
The proposal "makes a glitch in the tax code much worse and it benefits rich businessmen who want to buy massive S.U.V.'s," said Aileen Roder, program director for Taxpayers for Common Sense. "In essence we're buying these vehicles for these businesses."
But the administration says that greater business deductions will be a potent economic stimulant.
"Many small businesses have genuine needs for large vans, pickups and S.U.V.'s, whether it be for a farm, sales or industrial application," Dr. Graham said. "An updated tax deduction for small businesses is certainly needed."
Consider the Hummer H1 as an example of the new deduction. It is one of the largest and most expensive S.U.V.'s, with a base sticker price of $102,581, including destination charge. Under the Bush plan, small-business owners could use all of an annual $75,000 capital equipment deduction toward the purchase; the current equipment deduction allowance is just $25,000.
That is in addition to thousands of dollars in other deductions. Under existing rules, a business could deduct 30 percent from the base price left after the capital equipment deduction, a benefit put in place as part of a post-Sept. 11 stimulus package. In the case of the H1, that would be a further deduction of $8,274.
Finally, 20 percent could be deducted from what is left, part of the business deductions available for automobiles. For the H1, that would be $3,861 more in deductions.
The total would be more than $87,000 in deductions, or about $33,500 in savings in federal taxes alone for buyers in the highest bracket. Under current rules, just less than $60,000 could be deducted.
Deals for cars and small sport utility vehicles are much less appealing. Currently, a business can deduct no more than $7,660 for a car in its first year of service, $4,900 in the second year and less in the succeeding years. The Toyota Prius, which uses a fuel-efficient blend of gasoline and electric power, is eligible for an additional $2,000 clean vehicle deduction. That means a business owner could deduct under half of the $20,500 sticker price of the Prius in the first year of purchase, for about $3,700 worth of federal tax savings for those in the highest tax bracket.
David Friedman, an engineer and analyst at the Union of Concerned Scientists, an environmental group, said the increased deduction for big vehicles was "yet another loophole that the government is keeping open that is increasing our oil dependence."
"Before, it was large enough to drive a small S.U.V. through," he added. "Now it's large enough to drive a Hummer through."
Without altering the treatment of cars in the tax code, the Bush plan could run counter to the administration's recent decision to force automakers to improve the fuel economy of S.U.V.'s, pickups and minivans by 7 percent by middecade.
That is probably why the administration is open minded when it comes to reviewing the tax treatment of different kinds of vehicles.
Dr. Graham reiterated today that the administration was also considering further fuel economy measures. S.U.V.'s and pickups that weigh more than 8,500 pounds fully loaded have been exempt from federal fuel regulations. But the administration "is currently investigating whether those rules should be extended to larger light trucks" weighing as much as 10,000 pounds, he said.
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