Americans have developed a love/hate relationship with sport utility vehicles (SUVs). Some view them as a symbol of profligate consumption and reckless disregard for highway safety, environmental protection, and fuel economy. For others, they represent a triumph of automotive engineering and design, one that is manifested in their unrivaled combination of ample storage space, enhanced passenger safety, towing capability, bold styling, and freedom to explore rugged terrain that is inaccessible for the average passenger car. In the decade ending in 2003, SUVs became a conspicuous presence on American roads, streets, and highways, as their sales and average size and weight steadily increased. Although many SUV owners use them as they would a passenger car, there are some notable differences in design and performance between the typical SUV and the typical passenger car. Generally, SUVs tend to be taller and boxier. Many are built on the rigid chassis of a pick-up truck, giving them a relatively high clearance between the road surface and the undercarriage. Partly because SUVs tend to have a higher center of gravity than passenger cars, their ride feels bumpier and more like that of a truck, despite the availability of the same luxury options found in many automobiles. The increasing popularity of so-called crossover SUVs, which combine some of the attributes and looks of an SUV with the ride and handling of a passenger car, raises the possibility that over time the differences between the typical SUV and the typical passenger car will lessen. Concern over the effects of SUVs on air quality, highway safety, and fuel consumption has spawned a continuing debate over whether the federal government should subject these vehicles to more stringent regulatory standards for safety and fuel economy. Legislative activity by the 108 th Congress expanded the scope of debate to include the ways in which federal tax policy affects the demand for heavy-duty SUVs. In passing the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA, P.L. 108-27 ), the 108 th Congress hoped to achieve a variety of policy objectives, including faster growth in domestic business investment and job creation. Congressional debate over the measure gave no indication, however, that boosting domestic demand for heavy-duty SUVs was one of these objectives. Yet a provision in JGTRRA intended to stimulate small business investment in machinery and equipment (including most motor vehicles) and packaged software appeared to have such an effect. The provision made the expensing allowance under section 179 of the Internal Revenue Code (IRC) more generous in 2003 through 2005. Not surprisingly, producers of heavy-duty SUVs and their dealers welcomed the stimulus. At the time JGTRRA was enacted, both parties were earning sizable profit margins on domestic sales of such vehicles. But not everyone was pleased that the newly enhanced expensing allowance applied to large SUVs. SUV critics labeled it an "SUV tax loophole" that would be likely to stimulate increased sales of the vehicles. To forestall such an outcome, they requested that the allowance be modified so that heavy-duty SUVs no longer qualified for it. According to critics, the federal government was not protecting or promoting the public interest by granting a tax subsidy for the purchase of motor vehicles intended for business use that, in their view, received poor gas mileage, emitted high concentrations of air pollutants, and posed significant safety hazards to their own occupants and to passengers in other vehicles. Evidently, the 108 th Congress paid attention to these objections, for it included a provision to curtail the preference in the final tax bill it passed, the American Jobs Creation Act of 2004 (AJCA, P.L. 108-357 ). Under the provision, the expensing allowance for SUVs not subject to the depreciation limitations for passenger cars under IRC section 280F was limited to $25,000 for SUVs placed in service after October 22, 2004. This report examines how the federal tax code treats the purchase of heavy-duty SUVs for business use and discusses proposals in the 109 th Congress that would further change this treatment. Two statutory provisions make up the core of the report: the expensing allowance under IRC section 179 and the "gas guzzler" excise tax on domestic sales of new automobiles under IRC section 4064. Sport utility vehicles are classified as light trucks in existing data on domestic motor vehicle sales and production. In 2004, U.S. motor vehicles sales totaled 17.299 million units. Of that number, light trucks accounted for 54%, followed by passenger cars (43%) and medium and heavy trucks (2.5%). Sales of light trucks exceeded those of passenger cars for the first time in 2001. In 1992, by contrast, the share of passenger cars was nearly double that of light trucks: 63% to 35%. Propelling the sharp rise in the light-truck share of domestic motor vehicle sales from the early 1990s through the early 2000s was the increasing popularity of SUVs. U.S. sales of SUVs jumped from less than 1 million units in the early 1990s to around 4.5 million units in 2003. Automobile manufacturers contributed to this growth by spending large sums on developing, producing, and marketing these vehicles. As one might expect, this investment was driven by the prospect of reaping substantial profits. In 1998, the Ford Motor Company reportedly earned about $2.4 billion in after-tax profits from sales of just two of its SUV lines, the Expedition and Navigator. An analyst estimated that an SUV with a 2003 sticker price of $50,000 might yield a profit of $20,000 or more, whereas the profit on a minivan would be about one-tenth as much. Growth in domestic sales of SUVs appears to have slackened in both 2004 and 2005, though a lack of data from public sources makes it difficult to gauge the extent of the slowdown. During that period, what might be described as a growing split emerged within the domestic SUV market between full-size or heavy-duty SUVs and crossover SUVs. Sales of the former have been falling, while sales of the latter have been rising. In 2005, for example, U.S. purchases of large SUVs were 13.1% below the level in 2004, whereas purchases of crossover SUVs increased 13.5%. A variety of factors explain the drop in sales of full-size SUVs. Foremost among them are the advanced age of the design of the current crop of large SUVs, and changing tastes among car buyers—driven partly by a rising concern about excessive energy consumption and the upward spike in gasoline prices in 2004 and 2005. Nonetheless, at least one market research firm, J.D. Power and Associates, is predicting a rebound in domestic sales of large SUVs in 2006 and 2007 to levels seen in 2001 to 2003, driven by the advent of new models of full-size SUVs offering improved fuel economy. The enormous growth in domestic ownership of SUVs since the early 1990s has fueled a lively debate over their effects on highway safety, air quality, and U.S. reliance on foreign sources of crude oil and petroleum products, among other concerns. Critics charge that SUVs, especially the full-size models, wastefully consume gasoline, contribute more to air pollution and global warming than passenger cars, and pose a significant threat to the safety of their own passengers—as well as other people on the road. Owners of the vehicles retort that large SUVs offer greater protection to passengers than do smaller vehicles and are much safer than critics contend. They also argue that in a democratic society with a free-market economy, consumers should be allowed to own heavy-duty motor vehicles if they value personal safety more than gas economy. Sorting fact from fiction in the debate about the welfare effects of SUVs can be a challenge. A careful review of the literature on these effects reveals that SUVs have accounted for an increasing share of total fuel consumption and emissions by motor vehicles in the past decade or so. On average, their gas mileage has been lower, their emissions of carbon monoxide and nitrogen oxides higher, and their risk of rolling over in an accident greater than most passenger cars. In addition, compared to passenger cars, SUVs face less stringent federal standards for fuel economy and emissions, and their safety record is thought to receive less scrutiny from federal agencies. But several public announcements in recent years by both federal regulatory agencies and manufacturers of SUVs hold the promise that these discrepancies might shrink or disappear in coming years. A logical starting point for an examination of how the federal tax code affects the purchase of heavy-duty SUVs is the tax treatment of depreciation for motor vehicles in general and passenger cars in particular. Within this treatment lies the most important tax subsidy for the purchase of these SUVs for business use. It is difficult to comprehend the nature of this subsidy without having a good grasp of the current rules for recovering the cost of motor vehicles bought mainly for business use. In general, business taxpayers—C corporations, shareholders of S corporations, members of partnerships and limited liability corporations, and sole proprietors—are allowed to deduct all ordinary and necessary expenses they incur in determining their taxable income in a particular tax year. One such expense is depreciation, which represents the decline in the economic value of tangible and intangible business assets resulting from wear and tear and obsolescence. Under current tax law, the cost of a depreciable asset such as a building, patent, light truck, or machine tool is recovered over a specified period (known as the asset's tax life) using an allowable method of depreciation (e.g., the straight-line or double-declining balance methods). This period may or may not match an asset's actual useful life, which is often difficult to gauge. Usually in a bid to spur increased business investment, governments sometimes permit business taxpayers to recover the cost of specified depreciable assets well before their economic value has been exhausted.