LegiStorm

Summary:

Currently, on their 2017 federal income tax return, taxpayers may be able to claim two tax credits for residential energy efficiency. The nonbusiness energy property or “Section 25C” credit expired at the end of 2017. The residential energy efficient property or “Section 25D” credit is scheduled to expire at the end of 2021. The nonbusiness energy property tax credit (Internal Revenue Code [IRC] §25C) provides homeowners with a tax credit for investments in certain high-efficiency heating, cooling, and water-heating appliances, as well as tax credits for energy-efficient windows and doors. For installations made during 2011 through 2017, the credit rate is 10% of eligible expenses, with a maximum credit amount of $500. The credit available for 2011 through 2017 was less than what had been available during 2009 and 2010, when taxpayers were allowed a 30% tax credit of up to $1,500 for making energy-efficiency improvements to their homes. The residential energy efficient property credit (IRC §25D), which provides a 30% tax credit for investments in properties that generate renewable energy is scheduled to be in effect through the end of 2021, although the percentage of expenditures a taxpayer can claim will fall from 30% to 26% in 2020, and to 22% in 2021. Advances in energy efficiency have allowed per-capita residential energy use to remain relatively constant since the 1970s, even as demand for energy-using technologies has increased. Experts believe, however, that there is unrealized potential for further residential energy efficiency. One reason investment in these technologies might not be at optimal levels is that certain market failures result in energy prices that are below the socially optimal level. If energy is relatively inexpensive, consumers will not have a strong incentive to purchase a technology that will lower their energy costs. Tax credits are one policy option to potentially encourage consumers to invest in energy-efficiency technologies. Residential energy-efficiency tax credits were first introduced in the late 1970s, but were allowed to expire in 1985. Tax credits for residential energy efficiency were again enacted as part of the Energy Policy Act of 2005 (P.L. 109-58). These credits were expanded and extended as part of the American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5). The Section 25C credit was extended, at a reduced rate, and with a reduced cap, through 2011, as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312). At the end of 2012, the 25C credit was extended for 2012 and 2013 by the American Taxpayer Relief Act (ATRA; P.L. 112-240). The Section 25C credit was extended for 2014 by the Tax Increase Prevention Act (P.L. 113-295). The Section 25C credit was extended for 2015 and 2016 by the Protecting Americans from Tax Hikes Act (PATH Act), which was included in P.L. 114-113. The Section 25D credit as it applies to solar technologies was also extended and modified by P.L. 114- 113. Most recently, the Bipartisan Budget Act of 2018 (BBA; P.L. 115-123) extended the Section 25C credit for 2017, and extended the Section 25D credit for non-solar technologies through 2021, providing parity in Section 25D between solar and non-solar renewable energy technologies. Although the purpose of residential energy-efficiency tax credits is to motivate additional energyefficiency investment, the amount of the investment resulting from these credits is unclear. Purchasers investing in energy-efficient property for other reasons—for example, concern about the environment—would have invested in such property absent tax incentives, and hence stand to receive a windfall gain from the tax benefit. Further, the fact that the incentive is delivered as a nonrefundable credit limits the provision’s ability to motivate investment for low- and middleincome taxpayers with limited tax liability. The administration of residential energy-efficiency taxcredits has also had compliance issues, as identified in a Treasury Department Inspector General for Tax Administration (TIGTA) report. There are various policy options available for Congress to consider regarding incentives for residential energy efficiency. One option is to let the existing tax incentives expire as scheduled. Another option would be to repeal these tax credits. A third option would be to extend or modify the current tax incentives. Finally, policymakers could replace the current tax credits with a grant or rebate program. Grants or rebates could be made more widely available, and not be limited to taxpayers with tax liability