VW tax credits cost Uncle Sam millions

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By Bankrate

Volkswagen marketed its diesel-fueled autos as high performance, super clean and environmentally friendly.

Those promises were enough to convince tens of thousands of car buyers. The claims also got a nod of approval from the IRS.

Everybody was duped. And the German automaker’s dishonesty cost the U.S. Treasury millions in tax credits.

Millions wrongly paid

For more than a decade, various tax credits have been offered to buyers of fuel-efficient autos. Diesel vehicles, which are popular in Europe but have yet to hit U.S. roads in large numbers, were on that list for a while.

Buyers of some of the Volkswagen makes and models now in question got a tax credit of up to $1,300.

An analysis by the Los Angeles Times found that the IRS paid out as much as $51 million in alternative fuel vehicle tax credits for these Volkswagen diesel buyers in 2009, the 1st year the company manipulated the vehicles’ emissions software.

Will Uncle Sam ever get that money back?

Payback via EPA fines

Don’t worry, VW diesel drivers. You won’t have to repay the alternative fuel vehicle tax credits you got. Just as with victims of Bernie Madoff’s Ponzi scheme, the government will absorb that loss.

But some argue that Volkswagen should factor the associated tax credits into the Environmental Protection Agency fines it eventually will pay for its Clean Air Act violations.

Each of the affected 482,000 VW cars could be subject to a maximum fine of $37,500. That adds up to just more than $18 billion in total fines.

Don’t expect the feds to collect that much from VW. The EPA likely will take less than the precise fine amount just to be done with the matter quickly and get some money in hand. The German company has set aside around $7.2 billion to pay for its emissions violations.

So even if the tax credits aren’t expressly part of the final fine calculation, Uncle Sam will get back more than enough to cover the ill-paid tax breaks.

Too many tax credits?

The bigger question is: Should fuel-efficient auto and similar tax credits be offered in the first place?

There is a long history of lawmakers at all levels trying to use taxes to shape public behavior. Sin taxes are added or increased to discourage bad habits, such as smoking or eating unhealthy foods. Tax breaks are offered to encourage things that are seen as more positive, such as saving for retirement.

Should Uncle Sam reward or chide you through tax savings or penalties? The answer, like most everything involving taxes, is it depends.

It depends on your personal tax situation. Will you suffer or benefit? It depends on your political perspective. Are you in favor of more or less government involvement in your life?

In this particular case, I’d ax auto tax credits.

Tax breaks can help in the development of products, especially new ones competing with entrenched industries. The research and development tax credit, which is pending renewal as part of the tax extenders legislation, is a good example of how the tax code can help create new products and technologies that offer benefits for the greater good.

But tax credits for buying a specific product — in this case, cars — go too far. It’s not the government’s job to use tax money to do a company’s marketing. Once Uncle Sam has helped you develop your great new product, it’s up to you as the manufacturer to convince consumers of its value.

Federal lawmakers should have learned from the hybrid credit. The primary takers of that tax break were buyers of the Prius, an auto that already was the market leader. The tax break was just a bonus.

The situation is similar now in the electric car arena. The Tesla is the darling of this alternative fuel tax credit. Does Uncle Sam really need to be helping out people who can afford to shell out 6 figures for an auto? No.

Taxpayers shouldn’t be asked to pay for other people’s toys.