Hybrid credit gone for Toyota, fading fast for Honda
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Honda is the leader in another fuel-efficient auto area, the compressed natural gas, or CNG, vehicle. The energy legislation that created the hybrid credit also included tax breaks for three other fuel-efficient vehicles: advanced lean burn, fuel cell and alternative fuel.

Alternative-fuel vehicles run on compressed or liquefied natural gas, liquefied petroleum gas, hydrogen or any liquid that is at least 85 percent methanol. Honda's Civic GX operates on compressed natural gas and its 2005 through 2008 model years have been certified as tax-break eligible by the IRS.

CNG vehicles have two advantages over hybrids when it comes to taxes. The credit is usually larger and it does not phase out.

Two other Japanese automakers, Nissan and Mazda, have finally gotten onto the hybrid tax credit track.

Nissan's 2007 and 2008 Altima hybrids are certified by the IRS. That auto will get buyers a $2,350 credit.

Mazda had two versions of its Tribute approved by the IRS this summer and has not yet reported any relevant sales numbers. Its two-wheel-drive Tribute is worth a $3,000 credit and the four-wheel-drive version is worth a $2,200 savings on tax returns. When Nissan and Mazda sell enough Altimas, Tributes or any future IRS-approved vehicles they might make, the companies' credit amounts will phase out, too.

Domestic manufacturers also are a lap down to Toyota and Honda in the hybrid race.

The Ford/Mercury vehicles on the IRS-approved list accounted through September 2007 (latest available data) for just over 38,700 in sales. And GM didn't run its hybrid vehicles past IRS inspectors until the summer of 2006, so its numbers are expectedly small. Through that same period, GM had sold only 9,577 eligible hybrids.

Judging from the numbers so far, industry analysts say that it will be 2009 before buyers of the U.S. brands face any tax credit reductions. That's good for Ford and GM, since many of the tax-break amounts for their models are substantially lower than those of their Japanese competitors.

The tax credits are based on a combination of the qualifying vehicle's fuel economy and its total expected lifetime fuel savings, using 2002 fuel efficiency numbers as a base. Because the U.S. automakers got into the hybrid market after Toyota and Honda, they are still playing catch-up, even with the legislative help in the energy bill, and it shows in the credit amounts.

Ford's 2008 two-wheel-drive Escape, with a $3,000 credit, is the only domestic hybrid that matches or exceeds its Japanese counterparts. GM's Saturn Aura is worth a tax savings of $1,300, but most of the U.S. automaker's hybrids will net buyers between $250 or $650.

Home highway advantage
Energy conservation advocates generally appreciate the tax effort to encourage drivers to switch to fuel-saving hybrids. Many, however, say that politics trumped a more aggressive -- and to their way of thinking -- a more sound, approach to reducing U.S. driver dependence on gasoline.

"It's obvious that our government has a problem with creating an energy policy with any kind of vision," says Bradley Berman, editor of HybridCars.com. "The creation of the 60,000 cap was by and large designed to cut some slack to Detroit automakers, who are way behind."

Berman says the credit isn't likely to convert someone who was not even considering a hybrid. At best, it will simply make a potential hybrid buyer look a little more closely at all the alternative fuel makes and models.

Overall automotive costs are a bigger drive when it comes to picking a particular car, says Berman.

"Gas prices have a greater impact than the tax credit. People tend not to think of a large purchase in the big picture over the course of several years," he says.

"There are too many factors -- maintenance, resale value, interest rate on your loan -- that have a pretty significant impact over the long-term analysis of whether an auto purchase is a sound financial decision."

Cindy Knight, environmental communications administrator for Toyota in Los Angeles County, agrees, saying it was difficult for Toyota to determine whether the company's hybrid-leading sales were helped more by the tax break or high gasoline prices.

"We think that the tax credit is really nice," says Knight. "But we're not sure that it really influences a buyer. There's a combination of factors that makes a hybrid a popular choice right now."

Freelance writer Kay Bell writes Bankrate's tax stories from her Austin, Texas, home. She also maintains two tax blogs, Bankrate's Eye on the IRS, and Don't Mess With Taxes.