To amend the Internal Revenue Code of 1986 to provide tax incentives for replacing an automobile with a more fuel-efficient automobile.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Energy Efficient and Environmentally 
Friendly Automobile Tax Credit Act of 2008''.

SEC. 2. CREDIT FOR REPLACING AN AUTOMOBILE WITH A MORE FUEL-EFFICIENT 
              AUTOMOBILE.

    (a) In General.--Subpart B of part IV of subchapter A of chapter 1 
of the Internal Revenue Code of 1986 is amended by inserting after 
section 30C the following new section:

``SEC. 30D. CREDIT FOR REPLACING AN AUTOMOBILE WITH A MORE FUEL-
              EFFICIENT AUTOMOBILE.

    ``(a) In General.--In the case of an eligible purchase by an 
eligible taxpayer of a passenger automobile, there shall be allowed as 
a credit against the tax imposed by this chapter an amount equal to the 
lesser of--
            ``(1) the cost of the passenger automobile, or
            ``(2) $2,000.
    ``(b) Eligible Purchase.--For purposes of this section--
            ``(1) In general.--The term `eligible purchase' means any 
        purchase of a passenger automobile if--
                    ``(A) the taxpayer sells another passenger 
                automobile within a reasonable period surrounding such 
                purchase, and
                    ``(B) the average fuel economy of the purchased 
                automobile is at least 20 percent better than the 
                average fuel economy of the sold automobile.
            ``(2) Passenger automobile.--The term `passenger 
        automobile' has the meaning given such term in regulations 
        prescribed by the Administrator of the Environmental Protection 
        Agency for purposes of the administration of title II of the 
        Clean Air Act (42 U.S.C. 7521 et seq.). Such term includes a 
        light truck (within the meaning of such regulations).
            ``(3) Fuel economy.--Average fuel economy shall be 
        determined as provided in section 30B(h)(2).
    ``(c) Eligible Taxpayer.--For purposes of this section--
            ``(1) In general.--The term `eligible taxpayer' means--
                    ``(A) any individual, and
                    ``(B) any qualified business.
            ``(2) Qualified business.--The term `qualified business' 
        means any sole proprietorship, partnership, or corporation if--
                    ``(A) at least 40 percent of its total gross income 
                for the taxable year is derived from the active conduct 
                of transporting persons or property for hire, and
                    ``(B) in the case of a partnership or corporation, 
                all of the equity interests in which are held by 1 
                individual.
            ``(3) Aggregation rules.--All persons treated as a single 
        employer under subsection (a) or (b) of section 52, or 
        subsection (m) or (o) of section 414, shall be treated as 1 
        person for purposes of paragraph (2).
    ``(d) Application With Other Credits.--
            ``(1) Business credit treated as part of general business 
        credit.--So much of the credit which would be allowed under 
        subsection (a) for any taxable year (determined without regard 
        to this subsection) that is attributable to property of a 
        character subject to an allowance for depreciation shall be 
        treated as a credit listed in section 38(b) for such taxable 
        year (and not allowed under subsection (a)).
            ``(2) Personal credit.--The credit allowed under subsection 
        (a) (after the application of paragraph (1)) for any taxable 
        year shall not exceed the excess (if any) of--
                    ``(A) the regular tax liability (as defined in 
                section 26(b)) reduced by the sum of the credits 
                allowable under subpart A and sections 27, 30, 30B, and 
                30C, over
                    ``(B) the tentative minimum tax for the taxable 
                year.
    ``(e) Special Rules.--
            ``(1) Exception for business vehicles.--Except in the case 
        of a qualified business, subsection (a) shall apply only to 
        passenger automobiles substantially all of the use of which is 
        for personal, nonbusiness purposes.
            ``(2) Limitation on vehicles being replaced.--Except in the 
        case of a qualified business, subsection (b)(1)(A) shall apply 
        only to passenger vehicles which were substantially and 
        regularly used by the taxpayer for personal, nonbusiness 
        purposes.
            ``(3) Basis reduction.--The basis of any passenger 
        automobile for which credit is allowed under subsection (a) 
        shall be reduced by the amount of such credit.''.
    (b) Technical Amendments.--
            (1) Section 38(b) of such Code is amended by striking 
        ``plus'' at the end of paragraph (31), by striking the period 
        at the end of paragraph (32) and inserting ``, plus'', and by 
        adding at the end the following new paragraph:
            ``(33) the portion of the credit under section 30D 
        (relating to credit for replacing an automobile with a more 
        fuel-efficient automobile) to which section 30D(d)(1) 
        applies.''.
            (2) Section 55(c)(2) of such Code is amended by inserting 
        ``30D(d)(2),'' after ``30C(d)(2),''.
            (3) The table of sections for subpart B of part IV of 
        subchapter A of chapter 1 of such Code is amended by inserting 
        after the item relating to section 30C the following new item:

``Sec. 30D. Credit for replacing an automobile with a more fuel-
                            efficient automobile.''.

SEC. 3. DEDUCTION FOR STATE AND LOCAL TAXES IMPOSED ON PURCHASE OF MORE 
              FUEL-EFFICIENT AUTOMOBILES.

    Subsection (a) of section 165 of the Internal Revenue Code of 1986 
(relating to deduction for taxes) is amended by adding at the end the 
following new paragraph:
            ``(6) State and local taxes imposed on the purchase of any 
        passenger automobile (as defined in section 30D(b)(2)) for 
        which credit is allowed to the taxpayer under section 30D.''.

SEC. 4. DEDUCTION FOR INTEREST ON LOANS USED TO PURCHASE MORE FUEL-
              EFFICIENT AUTOMOBILES.

    Paragraph (2) of section 163(h) of the Internal Revenue Code of 
1986 (defining personal interest) is amended by striking ``and'' at the 
end of subparagraph (E), by striking the period at the end of 
subparagraph (F) and inserting ``, and'', and by adding at the end the 
following new subparagraph:
                    ``(G) any interest paid or accrued on indebtedness 
                incurred to purchase a passenger automobile (as defined 
                in section 30D(b)(2)) for which credit is allowed to 
                the taxpayer under section 30D.''.

SEC. 5. EFFECTIVE DATE.

    The amendment made by this Act shall apply vehicles purchased after 
the date of the enactment of this Act in taxable years ending after 
such date.

Summary: Energy Efficient and Environmentally Friendly Automobile Tax Credit Act of 2008 - Amends the Internal Revenue Code to allow individual and business taxpayers: (1) a tax credit for up to $2,000 of the cost of replacing a passenger automobile with another passenger automobile that is at least 20% more fuel efficient; and (2) tax deductions for state and local taxes and loan interest for the replacement automobile.