Alternative Fuels Incentive Act of 1988

Alternative Fuels Incentive Act of 1988 - Amends the Internal Revenue Code to permit a 20 percent income tax credit for investments in qualified clean-burning (natural gas or alcohol) motor vehicle fuel property. Applies the credit to depreciable property that is: (1) equipment designed either to modify a motor vehicle so that it will be propelled only by a clean-burning fuel or to assist in delivering such fuel into such vehicles; or (2) a motor vehicle propelled by clean-burning fuel.

Authorizes the Secretary of the Treasury to make credit-equivalent payments to States and to local governments in connection with qualified property.

Provides for the recapture of credit amounts if the relevant property ceases to be eligible for the credit.

Earmarks at least 25 percent of amounts transferred or credited to the Mass Transit Account in the Highway Trust Fund for grants to State and to local governments for clean-burning motor vehicle fuel property.