What is a Fuel Tax Credit?

Tax credits are tax reductions designed by legislators and administered by tax authorities. Credits are generally more desirable than tax deductions because a deduction simply reduces the amount of income subject to taxation, while a credit gives dollar-for-dollar tax relief. Credits are generally meant to compensate for inequities or to encourage certain behaviors. A fuel tax credit is designed to encourage taxpayers to purchase vehicles which have better fuel efficiency, or that use alternative fuel. Fuel tax credits, or energy credits, may also be designed to encourage investment in alternative fuel development, improving home fuel efficiency or reducing the energy required to operate certain appliances.

In the United States, a variety of fuel tax credits have been used at the national level to encourage conversion from fossil fuels to alternative fuels. These have come in the form of nonrefundable credits for individuals or businesses that purchase alternative fuel vehicles, and refundable credits to businesses that retrofit existing vehicles to use alternative fuels. A nonrefundable credit is one which can only reduce or eliminate a tax liability. For example, if a person has a tax liability of $1400 US Dollars (USD) and a nonrefundable tax credit of $1500 USD, the tax will be eliminated, but the additional $100 USD of credit will be unused. A refundable credit is one which will reduce or eliminate any tax liability, and refund any excess credit to the taxpayer.

At the federal level, a termination date or phase out provision has usually been attached to any fuel tax credit. For alternative fuel vehicles, this is primarily based upon how many of each type of qualifying vehicle is sold in the United States. When that number reaches a certain level, the amount of the credit is progressively reduced until it is finally eliminated. In some cases, a fuel credit has been given a specific ending date. Several states also offer a fuel credit, and many of them are more expansive and do not have the same phase out structure as the federal credit.

In the past, a tax credit for fuel was used throughout Europe to encourage consumers to buy vehicles which ran on diesel fuel instead of gasoline. These were so successful that diesel vehicles became as prominent as traditional gasoline-powered cars. Australia introduced a diesel fuel credit for large over-the-road trucks that were equipped with newer, more fuel efficient engines or met other environmental guidelines.

Other countries have employed a fuel tax credit as an incentive to reduce dependence on fossil fuels and lower carbon emissions. Some provinces in Canada have initiated green energy credits that include a number of fuel alternatives, including solar. Canada has also offered a fuel tax credit to biofuel producers, while the European Union (EU) and Brazil offer a tax credit at the pump.

Tax laws and credits are unique to each country and state or province. They are also subject to frequent legislative revision. If a tax credit is a consideration in making a purchase, the consumer should check the credits available in his jurisdiction prior to completing the transaction.