Bill Takes Aim at 'Hummer Tax Loophole'

New Hummers sit at a dealership in Southfield, Mich. i i

New Hummers sit at a dealership in Southfield, Mich. Bill Pugliano/Getty Images hide caption

itoggle caption Bill Pugliano/Getty Images
New Hummers sit at a dealership in Southfield, Mich.

New Hummers sit at a dealership in Southfield, Mich.

Bill Pugliano/Getty Images

Some people buying very large SUVs have been getting more than just a gas-guzzling, eye-turning luxury symbol: They've been getting a federal tax break.

The so-called "Hummer tax loophole" was created in 1984, when Congress tried to crack down on how much money could be written off for luxury vehicles used for businesses. The law excluded vehicles with a weight of more than 6,000 pounds, in an effort to keep expensive, heavy-duty equipment affordable for businesses that depend on them.

But many SUVs top out at well over the weight limit. That has allowed small-business owners and the self-employed to claim tax deductions of upwards of $25,000 for large luxury vehicles that may not have been a necessity for their businesses.

Rep. Ed Markey (D-MA), chairman of the Select Committee on Energy Independence and Global Warming, is one of several lawmakers who have drafted a bill to close the loophole, while still allowing legitimate small-business owners to get the deduction. Andrea Seabrook talks to Markey about the proposal:

Tell me what your bill would do. It would close what you call the "Hummer tax loophole." What is the Hummer tax loophole?

There actually is a tax break which gives a very favorable tax-depreciation schedule to people who buy Hummers, or vehicles like Hummers – the largest vehicles. It gives them a $25,000 additional tax break.

And this is for small businesses?

This is for anyone who says they need [a very large vehicle] for some business purpose. So what it says to a small-business person is that you actually get a break if you buy the bigger vehicle. Because the tax code isn't going to give you that same huge tax break.

The original purpose of this, as I understand it, was to give tax breaks to business people who need large pick-up trucks and large vehicles. These aren't necessarily millionaires running off to buy Hummers, right?

No, [the tax credit] was intended for, basically, people who needed it — if you ran a limousine service, for example, or you're a contractor who needed a larger vehicle. But what it morphed into was something that allowed just about anyone to claim the deduction once they said that they were a businessman or woman. So, if the Hummer tax loophole wasn't on the books, and there was an even tax-depreciation schedule across the board for all vehicles, the Congressional Budget Office reckons that the federal budget would save $4 billion. ... It would be a $4 billion tax savings over a five-year period.

So what would your bill do?

The bill would eliminate the tax break unless you qualified as a contractor, as a limousine service, as a farmer who needed the vehicle. But the break wouldn't be open-ended the way it is right now — which winds up with, unfortunately, business people deciding that they're going to purchase a Hummer or some large SUV only because the tax break is there.

Under this bill, how would small-business owners prove that they have a legitimate claim to a tax deduction?

That will have to be determined by a regulation written by the Internal Revenue Service pursuant to this law. But there will be a distinction that is made: The individual claiming this tax break will have to make a representation that it is essential to their business. I think is going to be very hard for many people to be able to claim that a Hummer is necessary for their insurance business or their law firm, or some other business that just does not have a heavy vehicle as a central part of its daily occupational needs.

What would eliminating the Hummer loophole accomplish?

If the Hummer tax loophole wasn't on the books, people would not decide, on the recommendations of their accountants, to buy the bigger vehicle because they got a bigger tax break. It would be a level playing field, and all vehicles, including hybrids, would be in a better situation to compete against Hummers, because the tax depreciation schedule would treat every vehicle equally.

Will changing the law really affect the sale of SUVs?

There will be much less of a financial incentive to purchase the larger vehicle, since smaller vehicles — the hybrids — will now be on a level playing field. There is a very high likelihood that people will no longer have this extra bias toward the larger vehicle because they're saving money.

This transcript has been edited for clarity. It includes portions of the conversation that were not broadcast on NPR.

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