Fuel's Gold

Rarely does the state offer cash incentives worth $22,000 to the average guy on the street.

And rarely have state budget analysts so badly misread the public's reaction to a new state law.

But thanks to a bill crafted by Speaker of the House Jeff Groscost, a legislative spending boondoggle that could reach sports-stadium proportions is lining the pockets of thousands of Arizonans who are jumping on a program that requires the state to pay up to 70 percent of the cost of a new car or truck.

The only catch?

The vehicle must be equipped with an alternative-fuel system such as natural gas, propane or electricity. But the program also includes vehicles that run on alternative fuels and good old gasoline -- or so-called "bi-fuel" vehicles.

The state Department of Commerce has received more than 6,000 applications to obtain the lucrative tax credits and grants under the alternative-fuel vehicle program since July 1, the date the law took effect. The tax credits and rebates range from 30 percent to 50 percent of the purchase price of the vehicles, depending on the emissions and whether the vehicle can also run on gasoline. The state will also provide a tax credit equal to 100 percent of the cost to install the alternative-fuel system -- which costs between $5,000 and $8,000.

So far, the state has approved 534 applications, with rebates averaging $22,000 each for a total of $11.8 million.

State budget analysts last spring grossly underestimated the impact of the program. According to documents obtained under the state public records law from the Joint Legislative Budget Committee, analysts predicted only 300 vehicles would be sold. The program was projected to cost about $3.4 million this fiscal year.

Instead, the cost of the program -- based on 5,359 applications already processed -- is about $122 million. And this doesn't include an unknown umber of people who have purchased alternative-fuel vehicles and are waiting for delivery before they apply to the state for rebates.

The drain on the state budget could be immense.

"This could hit the $200 million mark this year," says Ted Ferris, Governor Jane Hull's deputy chief of staff.

To stop the red tide, Governor Hull announced Tuesday that she will suspend the refundable tax provision beginning on October 11. After that date, tax credits must be spread out over five years.

The governor also plans to ask the Legislature to eliminate the program in January.

The state could be on the hook for more than $350 million if consumers rush to buy up to 37,000 vehicles (1 percent of the licensed vehicles in the state) and cash in on an unprecedented rebate bonanza before the Legislature closes loopholes in the law.

While the law supposedly was passed to help improve air quality, there is no requirement that the owners of bi-fuel vehicles must use alternative fuels. Popular pickup trucks are included in the program, which offers buyers tax credits and grants worth 40 percent of the sales price of a new truck if they add natural gas or propane fuel systems to the standard gasoline system.

Including bi-fuel vehicles in the program could diminish or possibly negate any air-quality benefits from increasing the number of alternative-fuel-only vehicles on the road.

"It doesn't make any sense because it's not going to help the pollution one stinking bit," says Berge Ford alternative-fuel vehicle salesman Bill Noble.

"People aren't going through the hassle to hunt down natural gas stations to buy it," he says. "They are just going to burn gasoline."

There are eight natural gas refueling stations in the Valley, but there are none in Arizona outside the Phoenix area; this makes longer trips in a natural-gas-powered vehicle problematic.

In a glaring omission, the law fails to provide rebates or tax credits for hybrid electric cars now on the market. The vehicles -- offered by Honda and Toyota -- never need to be recharged and increase gasoline mileage to more than 60 miles per gallon while slashing emissions.

The inclusion of bi-fuel vehicles in the program is a major issue with the governor, says Hull's press secretary, Francie Noyes.

"One of the things that has been a concern up here is the fact [that] you can get the [tax] credit for putting in this new system and go ahead and use regular gasoline," says Noyes. "That would seem to negate what we are trying to accomplish. If that is true, that is clearly a loophole that needs to be addressed."

Tim Hogan, director of the Arizona Center for Law in the Public Interest, calls the program "mind-boggling" for its inclusion of gasoline-powered "bi-fuel" vehicles and the lack of accountability to determine what impact, if any, the huge financial incentives will have on improving air quality.

For years, the center has taken a lead role in forcing the state and the U.S. Environmental Protection Agency to enforce clean-air laws. Hogan says the tax credits and rebates that will come out of the state general fund could have been better spent on other clean-air programs, including subsidizing the cost of emissions testing and improving public transportation.

"We are spending money on the wrong things and eliminating the wrong programs," Hogan says.

State budget analysts are scrambling to determine the fiscal impact of the law but can now only guess, since they don't know how many people plan to take advantage of the hefty tax credits and rebates.

"There is no way of knowing exactly what the cost will be," says an analyst with the Joint Legislative Budget Committee.

Hull's budget analysts also are just beginning to scour the data to try to anticipate the impact on this year's and next year's budget.

"Obviously, the marketplace has responded in a way that was not anticipated when this legislation was passed," says Tom Betlach, director of the governor's Office of Strategic Planning and Budgeting.

Not everyone is surprised by the public reaction to the program.

"We all anticipated a very strong reaction from the public," says Southwest Gas lobbyist Dick Foreman. "That was the purpose of the sponsor of the bill. The sponsor wanted to create demand."

The bill's chief sponsor was Groscost, a Republican from Mesa who two years ago held a consulting contract with a wholly owned subsidiary of Southwest Gas. The contract was worth more than $10,000 a year. Under the contract with LNG Energy Inc., Groscost worked in neighboring states promoting the use of natural gas to cities and towns.

Groscost did not return several calls placed to his office. Foreman says Groscost no longer works for LNG Energy.

Foreman says the Arizona law is an important first step in getting alternative-fuel vehicles on the highway and creating a demand for alternative fuels that will lead to more natural gas and propane fueling stations. (Foreman says Southwest Gas has no investments in natural gas fueling stations. Southwest Gas, however, is a distributor of natural gas.)

While public fueling stations are limited, the state is also providing financial incentives for Arizonans to install natural gas refueling stations at their homes. The state -- once again, through a tax credit -- will pay 100 percent of the cost to install a low-pressure, natural gas compressor that will refill a vehicle's tank overnight. The system -- manufactured by a Canadian company called Fuelmaker -- costs about $7,000 to install and can be used in any home that receives natural gas or is within 100 feet of a natural gas line.

Fuel from the home station costs only about 60 cents a gallon.

The state also is providing up to $400,000 in tax credits to businesses that construct natural gas or propane refueling stations open to the public.

There is no question that natural gas vehicles have fewer emissions than even the best gasoline-powered engines. Honda claims that its natural-gas-powered Civic will reduce emissions by 98 percent versus the cleanest-burning gasoline engines.

The law requires the state to pay up to 50 percent of the sales price of a "super ultra low emissions vehicle" -- such as a natural-gas-powered Honda Civic. The payment is made either through a grant, if the money is available from a $4 million fund at the state Department of Commerce, or a tax credit that can be collected on next year's taxes or applied to future state tax liability.

In addition, the state will provide a tax credit to cover 100 percent of the cost of the alternative-fuel system installed in the vehicle -- either by the manufacturer or with an after-market conversion.

That's not all. The state sales tax is waived and license plate fees slashed to $8 per year. The purchaser also receives up to a $2,000 income-tax deduction on federal taxes. Finally, the vehicles are allowed in freeway car-pool lanes while carrying only one occupant.

A $21,000 Honda Civic would cost only about $6,000 after the tax credits and rebates, says Jerry Polick, alternative fuel manager at Honda Cars of Mesa.

The sweetheart deals also are offered on large vehicles, with tax credits of more than $30,000 on Ford's F-450 -- a 12-ton behemoth flatbed truck.

A wide array of vehicles is eligible for the program, including, from Dodge, the Club van and wagons; from Ford, Crown Victoria, F-150 series, Ranger pickups and Econoline vans and wagons; from Chevrolet, Silverado, medium-duty pickups and Cavalier; and from GMC, Sierra pickup.

The tax credits and rebates range from 30 percent to 50 percent of the purchase price of the vehicles, depending on the emissions and whether the vehicle can also run on gasoline.

A $25,000 F-150 equipped with a bi-fuel system would receive a 40 percent tax credit or a grant worth $10,000 plus the amount equal to the cost to add the alternative-fuel system -- or around $7,000. This brings the total state rebate to $17,000. In addition, no sales tax would be paid.

There are a few drawbacks to the program. The state only has about $4 million a year available for grants, so most participants will get their refunds in the form of tax credits, which can be collected as refunds on state income taxes.

Heavy demand is pushing back delivery dates for most vehicles into next year. Honda Cars of Mesa, for example, is taking orders for 2001 natural-gas-powered Civics that would not be delivered until March, Polick says.

Prospective buyers must make a 10 percent cash down payment on the full price of the vehicle, even if delivery is months away. Vehicles delivered after January 1, 2001, won't be eligible to receive income-tax credits until 2002. Therefore, buyers of these vehicles must be able to pay the full purchase price of the vehicle and be willing to wait about a year before receiving the state funds.

Any credits and rebates received from the state are considered taxable income.

Even with a few disincentives, it's hard to pass up a deal in which the state will pay up to 70 percent of the cost of a new car or truck.

"Any way you look at it, you're saving money," says Berge Ford salesman Noble.

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John Dougherty
Contact: John Dougherty