Residential Energy Tax Credits:
Overview and Analysis
Margot L. Crandall-Hollick
Analyst in Public Finance
Molly F. Sherlock
Specialist in Public Finance
March 18, 2014
Congressional Research Service
7-5700
www.crs.gov
R42089
Residential Energy Tax Credits: Overview and Analysis
Summary
Currently, on their 2013 federal income tax return, taxpayers may be able to claim two tax credits
for residential energy efficiency: one expired at the end of 2013 and under current law cannot be
claimed beginning with 2014 tax returns; the other is scheduled to expire at the end of 2016. 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, 2012, or 2013, the credit rate is 10% of eligible expenses, with a
maximum credit amount of $500. The credit available for 2011, 2012, and 2013 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, such as solar panels, is scheduled to remain available
through 2016.
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 too low. 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).
Although the purpose of residential energy-efficiency tax credits is to motivate additional energy-
efficiency 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 middle-
income taxpayers with limited tax liability. The administration of residential energy-efficiency tax
credits has also had compliance issues, as identified in a recent 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 (as proposed in Chairman Camp’s tax reform
proposal). 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—the Home Star
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Residential Energy Tax Credits: Overview and Analysis
Energy Retrofit Act of 2010 (H.R. 5019/S. 3177 in the 111th Congress), for example. Grants or
rebates could be made more widely available, and not be limited to taxpayers with tax liability.
Enacting a grant or rebate program, however, would have additional budgetary cost.
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Residential Energy Tax Credits: Overview and Analysis
Contents
Introduction ...................................................................................................................................... 1
Current Law ..................................................................................................................................... 3
The Economic Rationale for Residential Energy-Efficiency Tax Credits ....................................... 4
Market Failures and Market Barriers ......................................................................................... 4
How Tax Credits May Address Market Failures and Market Barriers ...................................... 6
Analysis of Residential Energy Tax Credits .................................................................................... 7
Efficiency: Do Tax Credits Motivate Residential Energy-Efficiency Investments?.................. 8
Equity: Who Benefits from Residential Energy Tax Credits? ................................................... 9
Administration: Are Energy-Efficiency Tax Credits Administratively Simple and
Transparent? ......................................................................................................................... 11
Policy Options ............................................................................................................................... 12
Allow Tax Credits to Expire as Scheduled .............................................................................. 13
Extend or Modify Current Tax Incentives ............................................................................... 13
Replace Tax Credits with Grants or Rebates ........................................................................... 14
Figures
Figure 1. U.S. Energy Consumption by Sector ................................................................................ 1
Figure 2. Residential Energy Use Trends ........................................................................................ 2
Figure 3. Distribution of the Residential Energy Tax Credits by Claimants and Credit
Amount, 2011 ............................................................................................................................. 11
Tables
Table 1. Residential Energy-Efficiency Tax Credits in 2014 ........................................................... 3
Table 2. Distribution and Average Amount of Residential Energy Tax Credits,
by Adjusted Gross Income, 2011 ................................................................................................ 10
Table A-1. Nonbusiness Energy Property Tax Credit (§25C) ........................................................ 15
Table A-2. Residential Energy Efficient Property Tax Credit (§25D) ........................................... 16
Table B-1. Residential Energy Credits Claimed and Average Amount, 2006-2010 ...................... 19
Table B-2. Overview of Legislative Changes to the Nonbusiness Energy Property Tax
Credit (§25C), 2005-2012 ........................................................................................................... 21
Table B-3. Overview of Legislative Changes to Residential Energy-Efficient Property Tax
Credit (§25D), 2005-2010 .......................................................................................................... 22
Table C-1. Revenue Losses Associated with Residential Energy-Efficiency Tax
Incentives, 2008-2017 ................................................................................................................ 23
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Appendixes
Appendix A. Specifications for Property Eligible for Residential Energy-Efficiency Tax
Credits ......................................................................................................................................... 15
Appendix B. Legislative History ................................................................................................... 17
Appendix C. Budgetary Impact of Residential Energy Tax Incentives ......................................... 23
Contacts
Author Contact Information........................................................................................................... 24
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Residential Energy Tax Credits: Overview and Analysis
Introduction
Residential energy efficiency can benefit consumers through reduced utility bills, and support
national environmental policy objectives by reducing the demand for electricity generated using
fossil-fuels and reducing current strains on the electric power grid. Various policies to increase
conservation and energy efficiency have been adopted since the 1970s, including tax incentives.1
Developing and deploying technologies that are consistent with the most efficient use of our
nation’s energy resources is broadly appealing. What remains unclear, however, is what set of
policy tools the federal government should employ to meet energy-efficiency objectives.
In 2011, 22% of total energy consumed in the United States was consumed by the residential
sector (see Figure 1). Residential-sector energy use has been increasing over time, with the
residential sector today consuming roughly 8% more energy in 2011 than in 2000. Residential
energy use per capita, however, has remained relatively constant since the 1970s (see Figure 2).
Thus, while overall demand for energy in the residential sector has increased with population
growth, efficiency gains have allowed residential energy use per capita to remain relatively flat
even as consumers increasingly use energy-demanding technologies.
Figure 1. U.S. Energy Consumption by Sector
(2011)
Source: U.S. Energy Information Administration, Annual Energy Review, September 2012.
Notes: Total energy consumption in each end-use sector includes primary energy consumption, electricity retail
sales, and electrical system energy losses.
1 Policies that have been adopted to support energy efficiency and conservation, that are beyond the scope of this
report, include research and development (R&D) funding, pilot programs, and efficiency standards and mandates.
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Figure 2. Residential Energy Use Trends
(1949–2011)
Source: U.S. Energy Information Administration, Annual Energy Review, September 2012.
Although energy-efficiency gains have been made in recent decades, experts suggest that a large
potential for increased energy efficiency in the residential sector remains.2 Despite this potential,
concerns remain that consumers may not invest in the optimal level of energy efficiency. If this
potential for enhanced energy efficiency is realized in the coming decades, residential energy use
trends could change, perhaps leading to reduced residential energy use per capita over time.
However, population growth may still result in continued increases in total residential energy use.
This report explores one policy option for promoting residential energy efficiency: tax credits. It
begins by providing an overview of the current residential energy-efficiency tax credits3
(appendices to this report provide a more detailed legislative history). The report then goes on to
provide an economic rationale for residential energy-efficiency tax incentives, introducing the
concept of “market failures” and “market barriers” which may lead to suboptimal or
“economically inefficient” investment in energy-efficiency technologies. That section
summarizes various market failures and market barriers in the residential energy sector and
outlines ways tax incentives correct them. The final sections of this report provide an economic
2 For example, see Hannah Choi Granade, John Creyts, and Anton Derkach et al., Unlocking Energy Efficiency in the
U.S. Economy, McKinsey & Company, July 2009, http://www.mckinsey.com/Client_Service/
Electric_Power_and_Natural_Gas/Latest_thinking/Unlocking_energy_efficiency_in_the_US_economy.aspx.
3 The terms “residential energy-efficiency credits” and “residential energy credits” are used interchangeably in this
report. The Internal Revenue Service refers to these credits as “residential energy credits.”
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analysis of the primary tax incentives for residential energy efficiency and briefly review various
policy options.
Current Law
In 2013, taxpayers are eligible to claim tax credits for expenditures related to residential energy-
efficiency and residential renewable-energy generation technologies. The first credit, the
nonbusiness energy property tax credit (IRC §25C), allows taxpayers to claim a tax credit for
energy-efficiency improvements they make to the building envelope (insulation, windows, doors)
of their primary residence and for the purchase of high-efficiency heating, cooling, and water-
heating appliances they purchase for their primary residence.4 The amount of the credit is
calculated as 10% of expenditures on building envelope improvements plus the cost of each
energy-efficient property capped at a specific amount (ranging from $50 to $300), excluding
labor and installation costs. Given the price of high-efficiency heating, cooling, and water-heating
appliances, taxpayers generally claim the maximum amount of the credit for energy-efficient
property. The maximum value of the credit is capped at $500. This cap applies to claims for the
Section 25C credit made in the current year, as well as those made in the prior tax year. In other
words, if a taxpayer claimed $500 or more of the Section 25C credit prior to 2013, they cannot
claim it in 2013. Table 1 summarizes eligibility requirements for residential energy-efficiency tax
credits in 2013.
Table 1. Residential Energy-Efficiency Tax Credits in 2014
Section 25C Credit
Section 25D Credit
Calculation of credit
10% of Qualifying Energy-Efficiency
30% of Energy Efficient Property
Improvements + Qualifying Energy
Property
Types of Qualifying
Qualifying Energy-efficiency
Energy Efficient Property
Property
Improvements
(1) Solar Electric
(1) Insulation
(2) Solar Water Heating
(2) Windows (Including Skylights)
(3) Fuel Cell: $500 per 0.5kW of Capacity
(3) Doors
(4) Smal Wind Energy
(4) Qualifying Metal Roof
(5) Geothermal Heat Pumps
(5) Asphalt Roof with Cooling Granules
Energy Property and Associated Caps
(1) Electric Heat Pump; Central Air
Conditioner; Natural Gas, Propane, or Oil
Water Heater; Biomass Stove: $300
(3) Natural Gas, Propane or Oil Furnace or
Hot Water Boiler: $150
(4) Advanced Main Air Circulating Fan: $50
Credit Cap
$200 for windows (lifetime cap)
None
$500 (lifetime cap)
Scheduled Expiration
Expired on December 31, 2013
December 31, 2016
Source: CRS analysis of P.L. 109-58, P.L. 109-432, P.L. 110-343, P.L. 111-5 P.L. 111-312, and P.L. 112-240.
4 This residence must be an existing home, not a new home.
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The second credit, the residential energy efficient property tax credit (IRC §25D), allows
taxpayers to claim a tax credit for properties that generate renewable energy (e.g., solar panels,
geothermal heat pumps, small wind energy, fuel cells) that they install on their residence.5 The
amount of the credit is calculated as 30% of expenditures on technologies that generate renewable
energy, including labor and installation costs. The maximum value of the Section 25D credit for
renewable-energy-generating technologies other than fuel cells is not capped.6 The Section 25C
credit is scheduled to expire at the end of 2013, whereas the Section 25D credit is scheduled to
expire at the end of 2016.7 For more detailed information on the Section 25C and Section 25D
credits, including eligible energy-efficiency property specifications, see Appendix A. A
comprehensive legislative history of these credits can be found in Appendix B.
The Economic Rationale for Residential
Energy-Efficiency Tax Credits
A rational consumer would be expected to invest in an energy-efficiency technology if the
savings that resulted from using the property were greater than the cost of the property. For
example, if insulation was expected to lower home-heating costs to such an extent that the
homeowner fully recovered the costs of the insulation through lower heating bills, the homeowner
would be expected to make this purchase. However, some consumers appear to forgo making
these investments, which is known as the “energy-efficiency paradox.”
Various economic theories may help explain why consumers do not invest in the optimal amount
of residential energy efficiency. Certain “market failures” related to both the production and
consumption of energy may help explain why consumers do not make more investments in
energy-efficiency technologies, such that the optimal or “economically efficient” number of
consumers use these technologies. In addition to these market failures, other market barriers to
investment in residential energy efficiency have been identified.8 The Section 25C and Section
25D credits do not directly correct for some of the market failures and market barriers discussed
below, which may limit their impact on increasing energy efficiency.
Market Failures and Market Barriers
There are a variety of reasons why consumers may not make optimal investments in residential
energy efficiency. Market failures, including both externalities and principal-agent problems,
provide one possible explanation. Other market barriers, including capital market imperfections
5 For all technologies, except fuel cells, the credit can be claimed for installations of renewable-energy-generating
technologies made to any of the taxpayers’ residences, not just a principal residence. Eligible fuel cell installation must
be made on a taxpayer’s primary residence.
6 The credit for fuel cells is called at $500 per 0.5W of power capacity.
7 The renewable-energy-generating technology must be placed in service before December 31, 2016.
8 As part of the Energy Policy Act of 2005 (P.L. 109-58), Congress established an advisory committee to study this
issue. In 2007, the advisory committee released a report, Carbon Lock-In: Barriers to Deploying Climate Change
Mitigation Technologies. An analysis of this report can be found in CRS Report R40670, Energy Efficiency in
Buildings: Critical Barriers and Congressional Policy, by Paul W. Parfomak, Fred Sissine, and Eric A. Fischer. This
report presents market barriers likely to prevent efficient adoption of energy-efficient technologies, drawing on both the
Carbon Lock-In report and the economics literature on energy-efficient technology adoption.
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and informational issues, may also help explain suboptimal investment in residential energy
efficiency.
Energy consumption externalities are a potential reason why markets may underallocate resources
for residential energy-efficiency investment. Broadly, an externality is a cost or benefit associated
with a transaction that is not reflected in market prices. Specifically, residential electricity
consumption may be associated with negative environmental externalities, such as pollution
costs. If electricity prices do not reflect any potential negative environmental consequences of
electricity production, consumers do not pay the full cost associated with consuming electricity.
These lower prices lead consumers to consume more electricity than is optimal, and to
underinvest in energy efficiency.9
Conversely, the adoption of newly developed energy-efficient technologies may result in positive
externalities via “knowledge spillover” effects. For example, if one homeowner pays for and
installs a new type of solar panel on his home, his neighbors may see this technology, learn about
it, and be more likely to adopt it themselves.10 These knowledge spillover effects mean that, in
addition to the benefits to each individual consumer, the adoption of emerging technologies has a
greater benefit to society as a whole. Since markets fail to consider the benefits associated with
knowledge spillover effects, more of the technology should be adopted than is adopted under the
market forces of supply and demand.11
Another type of market failure, the principal-agent problem, can occur when there is a disconnect
between the incentives for those making energy-efficient property purchasing decisions (the
agent) and the ultimate energy consumer (the principal). For example, in non-owner-occupied
housing, landlords (agents) may underinvest in energy efficiency when tenants (principals) pay
the utility bills.12 Builders of new homes may also install lower-cost, less efficient technologies if
they do not believe the cost of installing high-efficiency products can be recovered when the
property is sold. Since the landlord and the builder make decisions regarding the level of energy-
efficiency investment, without knowing the energy use patterns of the end user (the tenant or
homebuyer), landlords and builders may not invest in the optimal amount of energy efficiency.
Capital market imperfections may also lead households to underinvest in energy-efficiency
property. Oftentimes, investments in energy efficiency involve high initial costs, followed by a
flow of savings. Purchasers unable to obtain funds up front may purchase less expensive, less
efficient alternatives. Low-income households tend to be more credit constrained, and therefore
more likely to settle for less energy-efficient alternatives when unable to borrow cash up front.13
9 As an example, consider an individual running an energy-using appliance, such as an air conditioner. While the
individual may consider the impact of the air conditioner on their electricity bill, they are unlikely to think about the
CO2 emissions associated with generating the electricity necessary to power the air conditioner. If carbon emissions are
not priced, and parties involved in transactions involving carbon emissions do not pay for the environmental cost of
such emissions, the market outcome will result in a higher level of emissions than is socially optimal.
10 Knowledge spillover benefits are most likely to result when consumers are considering adoption of new
technologies. Many of the products currently eligible for energy-efficiency tax incentives incorporate technologies that
have been available for a number of years, and are thus not new to the market.
11 Adam B. Jaffe, Richard G. Newell, and Robert N. Stavins, “Technology Policy for Energy and the Environment,” in
Innovation Policy and the Economy, ed. Adam B. Jaffe, Josh Lerner, and Scott Stern, 4th ed. (Cambridge, MA: The
MIT Press, 2004), pp. 35-68.
12 This assumes that landlords are not able to capture the benefits of greater energy efficiency through higher rents.
13 Low income borrowers that are given loans are likely to face higher interest rates. Since low income individuals face
(continued...)
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Finally, when consumers lack information about energy-saving technologies, they may be
unaware of the opportunity to make such investments. If consumers have some, but not all the
information relevant to make investments in energy-efficiency technologies, they may still be less
willing to make these purchases. For example, uncertainty about future energy prices may make
consumers reluctant to make irreversible energy-property investments.
How Tax Credits May Address Market Failures and
Market Barriers
Various government policies can be used to enhance the functioning of markets in the face of
market failures or market barriers. Tax incentives are one option. Other policy options, which are
beyond the scope of this report, might include non-tax incentives, such as grants, rebates, or
credit enhancements. (Although one particular grant program, Energy Star, is briefly discussed as
a policy option at the end of this report, a comprehensive analysis of this policy option is not
provided in this report.) The government may also choose to address energy market failures using
regulations or mandates. Governments can also support investments in energy efficiency through
informational programs (e.g., the Energy Star labeling program).
Policymakers can attempt to correct negative externalities associated with residential energy
consumption by using tax credits like the Section 25C and Section 25D credits to lower the cost
of energy-efficiency investments, thereby motivating additional investment in these technologies.
Other tax incentives not discussed in this report, like the energy-efficient appliance manufacturer
credit (IRC §45M), which lowers the cost of producing energy-efficient appliances (known as a
“supply-side” incentive), may also bring down the cost of certain technologies. (For a list of
residential energy-efficiency tax incentives, see Appendix C, Table C-1.) By encouraging
additional investment, the availability of tax credits may also address the positive externalities
that result from energy-efficiency technologies in terms of increased awareness about these
technologies. Governments can also increase knowledge about technologies with information
programs like the Energy Star labeling program.
However, if markets underinvest in energy efficiency because electricity prices are artificially
low, tax credits are not the most economically efficient policy option for increasing energy-
efficiency investment. Tax credits result in federal revenue losses and can provide windfall gains
to taxpayers. The most efficient way to increase investment in energy efficiency under these
circumstances would be to allow electricity prices to fully reflect electricity costs. This could be
done by removing existing federal financial support for electricity (e.g., energy-related tax
subsidies) or by taxing electricity production that generates external costs not currently reflected
in market prices. Increasing the price of electricity such that consumers face the full costs
associated with electricity consumption would encourage increased investment in energy-
efficiency technologies.
Most currently available tax incentives for residential energy efficiency do not directly address
the principal-agent problem discussed earlier. The Section 25C and Section 25D credits are not
available to renters, and thus do not directly encourage renters to invest in residential energy
(...continued)
higher interest rates, they are likely to use a higher discount rate when evaluating energy-saving investments. When
evaluated using a higher discount rate, fewer projects will appear to have long-run cost savings.
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efficiency. Further, since the Section 25C and Section 25D credits cannot be claimed for
investments made to rental property, landlords do not benefit from incentives designed to
encourage residential energy-efficiency investments. Other tax incentives not discussed in this
report, like the tax credit for energy-efficient new homes (IRC §45L), more directly address
potential principal-agent problems in the market for new homes.
Tax credits, which may be claimed several months after eligible purchases are made, will have
limited effect in overcoming capital market imperfections for homeowners who may be unable to
secure credit to pay for the upfront costs associated with energy-efficient technologies. Although
tax incentives for residential energy efficiency do reduce the cost of investment, tax credits may
not be the most effective policy option for providing immediate savings to consumers that are
credit constrained.14
Finally, in cases where consumers lack information about energy efficient technologies, and
additional information is not fully effective at alleviating this market failure, policies that
subsidize efficiency, like tax credits, may be beneficial and increase the adoption of these
technologies, thereby increasing societal welfare. However, recent research suggests that such
policies might decrease total welfare if adopted by those who are well-informed about energy
efficiency. For such consumers, tax credits will not be necessary to encourage them to make
energy efficient investment, and will instead provide a windfall gain to the recipients.15 Hence,
according to this research, tax credits will be of the greatest benefit when they target consumers
subject to the largest energy inefficiencies.
Although the two tax credits analyzed in this report are designed to encourage additional
investment in residential energy-efficient property in existing homes, they may not rectify other
existing market failures, limiting their ability to increase usage of energy-efficient technologies to
their optimal or economically efficient levels.
Analysis of Residential Energy Tax Credits
The following sections provide a brief economic analysis of the Section 25C and Section 25D tax
credits, evaluating their behavioral effects on increasing investment, their fairness or equity, and
potential administrative issues. From an economic standpoint, tax incentives are effective if they
succeed in causing taxpayers to engage in the desired behavior. In the case of residential energy-
efficiency tax benefits, it is not clear how effective such tax credits are at causing additional
investment, as opposed to rewarding consumers that would have made investments absent tax
incentives. Residential energy tax credits also tend to benefit higher-income taxpayers, an issue
which is explored in detail below. Finally, the Treasury Inspector General for Tax Administration
(TIGTA) has identified administrative issues with the current tax benefits for residential energy
efficiency. The results of their report are also summarized below.
14 As an alternative, grants or rebates that reduce the cost of energy-efficient property at the time of purchase are a more
direct mechanism for reducing upfront costs. If capital market imperfections are preventing investment in energy-
efficient technologies, a consumer loan program would be a more direct option for addressing this market barrier.
15 For more information, see Hunt Allcott and Michael Greenstone, “Is There An Energy Efficiency Gap?,” NBER
Working Paper Series , January 2012, Working Paper 17766, http://www.nber.org/papers/w17766.pdf?new_window=
1.
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Efficiency: Do Tax Credits Motivate Residential
Energy-Efficiency Investments?
The goal of residential energy-efficiency tax credits is to encourage individuals to increase
residential energy-efficiency investments. From the government’s perspective, these tax policies
are successful if tax credits cause additional residential energy-efficiency investment. If, however,
tax credits simply reward consumers for investments that would have been made absent such tax
incentives, then the tax incentives are not achieving the policy goal. Tax credits that reward
consumers for residential energy-efficiency investments, rather than lead consumers to make
additional residential energy-efficiency investments, provide a windfall gain to credit recipients
without resulting in additional economy-wide energy-efficiency investment or reduced energy
consumption.
Concerns that tax credits for residential energy efficiency may not generate additional investment
were raised when such credits were first introduced in the 1970s. In 1979, one year after
residential energy tax credits were first introduced, several Members of Congress voiced their
reservations about these tax credits in a series of House Ways and Means hearings on President
Carter’s proposals to expand residential energy tax benefits. During one of these hearings,
Representative Bill Frenzel remarked,
I am nervous about tax credits. The principal tax credit bill we passed last year does not seem
to have given great incentive in the marketplace. The drain on Treasury has been less than
we expected because people did not flock to take advantage of it. The tax credit tends to be a
reward for economic action that was forced by other factors. The tax credit does not
motivate, but rather simply occurs at the end of the year when the fellow finds out there was
a tax credit available. And I do not think that is a very efficient and effective stimulus.16
Empirical evidence evaluating whether the residential energy tax credits available in the late
1970s and early 1980s caused additional investment in energy-efficiency property is mixed.
Although some researchers found that tax incentives that reduced the price of energy-efficiency
property would lead to additional investment,17 others found that the tax credits were instead
more likely associated with windfall gains to credit recipients as opposed to additional energy-
efficiency investment.18 Whether tax credits can result in additional energy-efficiency investment
remains an issue to be considered by policymakers evaluating options for encouraging enhanced
residential energy-efficiency investment.
There are several reasons why residential energy tax credits may not have a significant impact on
purchasing decisions for many consumers. First, consumers investing in residential energy-
efficiency improvements may be responding to other market incentives, such as the high price of
energy. For the consumer that would have invested in residential energy-efficiency property
without the tax incentive, federal revenue losses associated with the tax credit are windfall gains
16 U.S. Congress, House Committee on Ways and Means, The President’s Energy Program, Phase III, committee print,
96th Cong., 1st sess., July 1979, p. 317.
17 See Kevin A. Hassett and Gilbert E. Metcalf, “Energy Tax Credits and Residential Conservation Investment:
Evidence from Panel Data,” Journal of Public Economics, vol. 57, no. 2 (June 1995), pp. 201-217.
18 See Michael J. Walsh, “Energy Tax Credits and Housing Improvement,” Energy Economics, vol. 11, no. 4 (October
1989), pp. 275-284 and Jeffery A. Dubin and Steven E. Henson, “The Distributional Effects of the Federal Energy Tax
Act,” Resources and Energy, vol. 10, no. 3 (1988), pp. 191-212.
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to the consumer. Second, savings associated with tax credits are not realized until tax returns are
filed, often months after energy-efficiency property is purchased. This reduces the incentive
power of the credit. Third, tax credits only reduce the price of investment in residential energy-
efficiency property for taxpayers having income tax liability to offset with credits. Estimates
suggest that in 2011, 46% of U.S. households will have no federal income tax liability, meaning
that tax credits for energy-efficiency investment do not provide a current financial incentive for
such investments for these taxpayers.19
Tax incentives for residential energy efficiency are most likely to motivate energy-efficiency
investments for certain types of taxpayers. As noted above, tax incentives only create a financial
incentive for investment for taxpayers with tax liability. Thus, higher-income taxpayers are more
likely to benefit from residential energy-efficiency tax incentives. Higher-income taxpayers are
also more likely to be motivated to invest in residential energy efficiency through tax incentives.
Tax credits may also motivate those already in the market for energy property to make more
efficient choices. If consumers choose to invest in certain residential energy-efficiency
equipment, such as heating and cooling property, only when existing units are no longer
operational, tax credits might motivate the purchase of high-efficiency units amongst taxpayers
with tax liability.
Equity: Who Benefits from Residential Energy Tax Credits?
The purpose of residential energy-efficiency tax incentives is to increase investment in energy
efficiency and properties that generate renewable energy. For these tax credits to be effective,
they must be targeted at individuals and households that make choices regarding energy property
investments. For residential credits, the target population is homeowners. Taxpayers that are
homeowners tend to be higher income than taxpayers living in renter-occupied housing.20 Hence,
it would be expected that energy tax incentives targeted at homeowners would tend to benefit
higher-income taxpayers.
This is borne out in tax data, as residential energy-efficiency tax credits are predominantly
claimed by middle-and upper-income taxpayers (see Table 2 and Figure 3). In 2011, roughly
three-quarters (73.2%) of residential energy tax credits claims were made on tax returns with
adjusted gross income (AGI) above $50,000.21 In addition, these tax units claimed 81.7% of the
total value of residential credits in 2011. Although tax units with incomes below $50,000
compose nearly two-thirds (65.4%) of all tax units, approximately one-quarter (26.8%) of tax
units in this income class claim residential energy tax credits, claiming less than 19% of the total
value of these credits. In addition, as a tax unit’s income rises, the average amount of its
residential credit also rises, such that tax units with the highest income level receive on average a
credit that is more than eight times the average credit value for the lowest income tax unit.
19 See Rachel Johnson, James Nunns, and Jeffrey Rohaly et al., Why Some Tax Units Pay No Income Tax, Tax Policy
Center: Urban Institute: Brookings Institution, July 2011, http://www.taxpolicycenter.org/UploadedPDF/1001547-
Why-No-Income-Tax.pdf; and CRS Report R41362, Who Doesn’t Pay Income Taxes?, by Thomas L. Hungerford.
20 According to the American Housing Survey, in 2009 the median income of homeowners was $60,000 compared to
$28,400 for renters.20
21 In this section, tax returns and tax units are used interchangeably and include returns with no taxable income. A tax
unit is not necessarily an individual, but represents all the individuals included on an income tax return including
spouses and dependents.
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Table 2. Distribution and Average Amount of Residential Energy Tax Credits,
by Adjusted Gross Income, 2011
Percentage of Tax
Percentage of
Returns Claiming
Total Amount of
Adjusted Gross
Percentage of All
Residential
Credit (Revenue
Average Amount
Income
Tax Returns
Credits
Loss)
of Credit
$0-$15K 26.5%
1.0%
0.4% $193.85
$15K-$30K 21.4%
7.8%
4.3%% $255.82
$30K-$50K
17.5% 17.9% 13.5% $345.37
$50K-$75K
13.0% 22.2% 14.5% $299.55
$75K-$100K 8.2%
18.1%
15.8%
$400.99
$100K-$200K
10.2% 25.8% 29.3% $521.77
$200K and above
3.2%
7.0%
22.2%
$1,454.01
TOTAL
100.0% 100.0% 100.0% $460.06
Source: CRS calculations based on the 2011 IRS Statistics of Income (SOI) data, Table 3.3, http://www.irs.gov/
taxstats/indtaxstats/article/0,,id=96981,00.html.
Note: Items may not sum to 100% due to rounding.
The non-refundability feature of the Section 25C and Section 25D tax credits may limit who can
claim these tax benefits. By definition, the value of a nonrefundable credit cannot exceed a
taxpayer’s tax liability. Although the Section 25D tax credit can be carried forward to offset tax
liability in future years, the Section 25C credit cannot be carried forward. Thus, taxpayers without
sufficient tax liability in the current year cannot benefit from the Section 25C credit. Taxpayers
that eliminate their tax liability through claims of other tax incentives, such as those for the
working poor, child-related tax incentives, and education tax benefits, are not able to benefit from
certain tax-related residential energy-efficiency incentives.
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Figure 3. Distribution of the Residential Energy Tax Credits
by Claimants and Credit Amount, 2011
Source: CRS calculations based on the 2011 IRS Statistics of Income (SOI) data, Table 3.3, http://www.irs.gov/
taxstats/indtaxstats/article/0,,id=96981,00.html.
Residential energy-efficiency tax incentives tend to be limited to higher-income taxpayers which
may undermine one of the policy rationales behind using tax credits to motivate energy-efficiency
investments. If households are not investing in energy-efficiency property because of the high up-
front costs, and because these households are credit constrained, then tax credits that reduce this
cost might encourage additional investment. However, if the tax credits are available only to
higher-income households, households that are less likely to be credit constrained, then tax
incentives may not be the most effective policy option for addressing this market barrier.
Administration: Are Energy-Efficiency Tax Credits
Administratively Simple and Transparent?
An ideal tax code would be simple for taxpayers to comply with while also being simple for the
government to administer. Taxpayers are more likely to claim tax benefits where compliance
costs are low. If filing for certain tax benefits becomes too burdensome, eligible taxpayers might
elect not to claim certain tax benefits, and therefore not respond to certain incentives delivered
through the tax code.
There may be a trade-off, however, between allowing for tax credits with little reporting
requirements and overall taxpayer compliance. In April 2011, the Treasury Department’s
Inspector General for Tax Administration (TIGTA) released a report on the residential energy tax
credits which found that the processing of these credits provided numerous opportunities for
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fraud.22 Specifically, TIGTA found that the IRS could not verify whether individuals that claim
either the Section 25C or Section 25D residential credit actually made qualifying energy
modifications to their homes and whether the modifications they made were for their residence.
The IRS was unable to confirm that claimants of these credits are eligible for them when income
tax returns were processed because they do not require taxpayers to provide information about the
residences where they are installed, nor do they require third-party verification (i.e., receipts) that
qualifying expenses were incurred. Prior to the issuance of the 2011 tax form (filed in 2012), the
form that taxpayers used to claim both of these credits, IRS Form 5695, did not ask taxpayers for
any information that would confirm their eligibility for these credits. As a result, TIGTA was
unable to confirm that 30% of taxpayers in their sample23 who claimed the credits were even
homeowners. The TIGTA report also noted that analysis of 2009 tax returns indicated that 5% of
tax returns claiming these credits did not show any indication of homeownership.
The IRS updated Form 5695 beginning with the 2011 tax year to request additional information
about the taxpayer’s home where the energy efficiency improvements take place. For example,
for the 25C credit, the form now asks taxpayers if the residential energy costs are for the
taxpayer’s main home in the United States. The form also requests the address of the home where
the residential energy efficiency improvements were made, as well as confirmation that the home
is an existing (not newly constructed) home. While taxpayers still commit fraud and lie on these
forms, this information can be used to determine if taxpayers have mistakenly claimed these
credits. TIGTA also found that 362 prisoners or underage individuals were allowed to claim
$404,578 worth of these credits erroneously. Generally, prisoners and underage children will be
ineligible for these credits because if they are prisoners for an entire year, they will tend to be
unable to purchase the energy-saving improvements, and underage individuals are unlikely to
have purchased a residence. TIGTA made several recommendations to the IRS, including (1)
revise Form 5695 to require the address of the applicable residence and whether that residence
was a principal or secondary residence and (2) use available data on prisoners and underage
individuals to ensure they are eligible for the residential energy tax credits. Notably, TIGTA did
not recommend that the IRS also require third-party validation of qualifying expenditures.
Although this information could be valuable in determining eligibility for these credits, it might
also increase processing times and costs which would increase complexity for taxpayers and the
IRS.
Policy Options24
The Section 25C and Section 25D tax credits are temporary provisions, and one policy option
available to Congress is to allow these tax credits to expire as scheduled. Absent congressional
action, the Section 25C credit for nonbusiness energy property will not be available after 2013.
22 Treasury Inspector General For Tax Administration, Processes Were Not Established to Verify Eligibility for
Residential Energy Credits, Reference Number: 2011-41-038, April 19, 2011, http://www.treasury.gov/tigta/
auditreports/2011reports/201141038fr.pdf.
23 TIGTA examined a statistically representative sample of 150 tax returns.
24 The policy options discussed here include incentive-oriented options. Alternative policy options could be to impose
regulations or standards mandating certain levels of energy efficiency. While standards and mandates may work to
increase energy efficiency in newly installed property, imposing standards and mandates provide limited incentives for
increasing efficiency in existing residential property.
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The Section 25D program is not scheduled to expire until the end of 2016. There may be other
policy options Congress might want to consider regarding future incentives for residential energy
efficiency, including modifying the credits or replacing them with a grant program.
Allow Tax Credits to Expire as Scheduled
One option regarding these
credits is to let them expire as
Proposed Changes to Residential Energy Tax
scheduled. For taxpayers who
Credits Under Chairman Camp’s Tax Reform Plan
base their purchasing decisions
On February 26, 2014, Chairman Camp introduced a draft tax reform
on the availability of credits,
bill, which among other tax changes, would repeal both the 25C and
25D tax credits, effective beginning in 2015.
this may result in taxpayers
choosing not to make eligible
The Joint Committee on Taxation (JCT) estimates that these changes
purchases after their
would increase revenues by $2.3 billion between 2014 and 2023,
entirely attributable to repealing 25D. Since 25C expired at the end of
expiration.25 However, in so far
2013, repealing it in 2014 would have no budgetary effect.
as the credits are claimed by
people who would make
qualifying purchases absent these incentives, the expiration of these provisions would eliminate a
windfall tax benefit while reducing revenue losses. Under current law, the Section 25D tax credit
results in an estimated $0.2 billion in revenue loss annually. The two-year extension of the
Section 25C tax credits enacted at the end of 2012 was estimated to result in $2.4 billion in
revenue loss between 2013 and 2014.
Extend or Modify Current Tax Incentives
Policymakers may choose to extend, expand, or otherwise modify residential energy-efficiency
tax incentives. As detailed in the legislative history in Appendix B, the current tax credits for
residential energy efficiency have undergone a number of changes since being added to the code
in 2005. Extending the credit in its current form, with the $500-per-taxpayer cap in place, would
provide limited incentives for additional investment for homeowners that have already claimed
tax credits under Section 25C. These credits can be expanded in a variety of ways, including by
calculating the credit using a more generous formula, expanding the types of technologies eligible
for the credit, and by removing caps (both technology-specific and aggregate caps). Expansions
may provide additional incentives that could encourage taxpayers to make more purchases. As
illustrated in Table B-1, the value of these credits grew nearly five times between 2007 (when
both Section 25C and Section 25D were in effect) and 2009 (when ARRA expanded these tax
credits). Further, expansion of these credits may also provide additional windfalls to taxpayers
who were going to make these purchases anyway.
Policymakers could also scale back these provisions in a variety of ways, including by reinstating
technology-specific caps for the Section 25D credit, introducing an overall cap for the Section
25D credit (currently uncapped), reducing the technology-specific caps of Section 25C, or
reducing the overall cap on Section 25C. Given that these would be changes from current policy,
they may increase confusion among taxpayers when trying to estimate the size of their credits.
Policymakers could also phase-out these credits for upper-income taxpayers who would be more
25 Alternatively, before the expiration of these provisions, taxpayers may increase their purchases of energy-efficient or
renewable-energy-generating technologies to take advantage of these provisions before they expire.
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likely to make eligible purchases without the credits. Extension of current policy, whether in
current form, expanded, or scaled back, will have a greater budgetary cost than expiration of these
benefits.
Replace Tax Credits with Grants or Rebates
Finally, policymakers may seek to replace these tax credits with a rebate program, or some
alternative mechanism to provide direct cash payments to consumers for eligible purchases. This
may be a more beneficial way to provide incentives to consumers purchasing energy-efficiency or
renewable-energy-generating technologies, especially for consumers who do not have sufficient
funds to make eligible expenditures and cannot wait until they file their taxes to receive a
financial benefit from their purchases. Such a program could also benefit those with little or no
tax liability who cannot benefit from nonrefundable tax credits. In 2010, both the House and
Senate introduced legislation intended to create a rebate program, with rebates payable to
contractors installing qualified energy-efficiency property.
The Home Star Energy Retrofit Act of 2010 (H.R. 5019 and S. 3177 and included in S. 3663)
would have created a temporary two-tiered rebate program called Home Star. Its Silver Star
program tier would have provided up to $3,000 per home in rebates for straightforward home
upgrades, including insulation; efficient heating, ventilation, and air conditioning units; new
windows; and other measures. The Gold Star program tier would have offered $3,000 rebates for
more comprehensive energy retrofits achieving at least 20% energy savings, with rebates
increasing up to $8,000 per home for retrofits achieving 45% energy savings.26 Although some
experts believed the Home Star program would result in an increased purchases of energy-
efficiency improvements to homes, there were concerns that it could be more costly than
expected (the legislation authorized $6 billion in appropriations), that there might be difficulties
with its administration, and that it would not provide sufficient benefit to do-it-yourself repairs or
improvements.27 The legislation, which passed the House in 2010, was not considered by the
Senate in the 111th Congress. To date, similar legislation has not been introduced in the 113th
Congress.
26 For more information, see http://homestarcoalition.org/HOME_STAR_Overview.pdf.
27 For more information on the Home Star program, including operational issues, see CRS Report R41273, The Home
Star Energy Retrofit Act of 2010: Operational and Market Considerations, by Paul W. Parfomak.
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Appendix A. Specifications for Property Eligible for
Residential Energy-Efficiency Tax Credits
This appendix provides additional details on the technical standards for property to qualify for the
tax credits in IRC Section 25C and Section 25D.
Table A-1. Nonbusiness Energy Property Tax Credit (§25C)
(2012 and 2013)
Property Qualifying
Standard
Energy-efficiency Improvements to Building Envelope
Insulation materials or systems
Meets 2009 International Energy Conservation Code (IECC)
and Amendments
Windows, doors, and skylights
Must be Energy Star Qualified
Roofs
Metal roofs with appropriate pigmented coatings and asphalt
roofs with appropriate cooling granules that also meet
Energy Star requirements
Energy Efficient Property
Electric Heat Pump (air source)
For split systems: Heat Seasonal Performance Factor (HSPF)
≥ 8.5, Energy Efficiency Ratio (EER) ≥ 12.5, Seasonal Energy
Efficiency Ratio (SEER) ≥ 15. For package systems: HSPF ≥
8, EER≥12, SEER ≥ 14
Central Air Conditioner
For split systems: SEER ≥ 16, EER ≥ 13. For package
systems: SEER ≥ 14 and EER ≥ 12.
Natural Gas, propane or oil water heater
Energy Factor ≥ 0.82 or a thermal efficiency or at least 90%
Electric Heat Pump Water Heater
Energy Factor ≥ 2.0
Natural gas, propane, or oil furnace
Annual Fuel Utilization Efficiency (AFUE) ≥95
Natural gas, propane or oil water boiler
AFUE ≥ 95
Advanced main air circulating fan: $50
Must use no more than 2% of the furnace’s total energy
Biomass Fuel Stoves
Thermal efficiency rating of at least 75%
Source: U.S. Department of Energy, Energy Star Program, http://www.energystar.gov/, 2012 and 2013 Federal
Tax Credits for Consumer Energy Efficiency Updated January 30, 2013.
Notes: In 2012 and 2013, the aggregate amount of credit is limited to $500 per taxpayer. A taxpayer is ineligible
for this tax credit if this credit has already been claimed by the taxpayer in an amount of $500 in any previous
year, including 2009 and 2010 when the aggregate credit limits were higher. The credit is only available for
expenditures for an existing home that is the taxpayer’s principal residence. New construction and rentals do
not qualify.
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Table A-2. Residential Energy Efficient Property Tax Credit (§25D)
(2013)
Property Qualifying
Standard
Solar electric and solar water heating property
Qualifying property must be used exclusively for purposes
other than heating swimming pools and hot tubs and must
meet applicable fire and electrical code requirement. At
least half of the energy generated by a solar water heating
property must come from the sun and the system must be
certified by the Solar Rating and Certification Corporation
(SRCC) or a comparable entity endorsed by the
government or the state in which the property is installed.
Fuel cell
Efficiency of at least 30% and must have a capacity of at least
0.5 kW
Smal wind
Nameplate capacity of not more than 100 kW
Geothermal heat pumps
Water to Air: For closed loop: EER ≥ 17.1 and Coefficient
of Performance (COP) ≥ 3.6. For open loop: EER ≥ 21.1 and
COP ≥ 4.1.
Water to Water: For closed loop: EER ≥ 16.1 and
Coefficient of Performance (COP) ≥ 3.1. For open loop:
EER ≥ 20.1 and COP ≥ 3.5.
For direct expansion: EER ≥ 16 and COP ≥ 3.6
Source: U.S. Department of Energy, Energy Star Program, http://www.energystar.gov/, 2012 and 2013 Federal
Tax Credits for Consumer Energy Efficiency Accessed March 18, 2014.
Notes: Excluding fuel cel properties, the credit is available for expenditures for principal residences and second
homes. Both existing homes and new construction qualifies. Rental units do not qualify. For fuel cel instal ations,
the credit is restricted to principal residences (existing homes and new construction). Rentals and second homes
do not qualify.
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Appendix B. Legislative History
Tax credits for residential energy efficiency were first introduced in the late 1970s. These
incentives were allowed to expire in the mid-1980s. The present-day residential energy tax
incentives, introduced in 2005, are similar to the earlier incentives of the late 1970s and early
1980s.
Residential Energy Credits in the 1970s and 1980s
The Energy Tax Act of 1978 (P.L. 95-618) introduced the first tax credit for conservation and
renewable-energy generation. Specifically this credit had two components. The first component
was calculated as 15% of the first $2,000 of energy-conservation expenditures (a maximum credit
value of $300). The second component was calculated as 30% of the first $2,000 in qualified
expenditures for solar, wind, and geothermal energy plus 20% of the next $8,000 in qualified
expenditures (a maximum credit value of $2,200). The final value of the credit was the sum of
these two components, with the maximum value equaling $2,500. In 1980, Congress passed the
Crude Oil Windfall Profit Tax Act of 1980 (P.L. 96-223), which increased the amount of the
credit.28 Specifically, this law increased the amount of the second component of the credit
attributable to renewable energy generation to 40% of the first $10,000 of expenditures (yielding
a maximum value of $4,000 for this component of the credit). This credit was allowed to expire at
the end of 1985. Not until 2005, 20 years later, would Congress again enact federal tax credits for
residential energy efficiency and renewable-energy property.
The Energy Policy Act of 2005
The Energy Policy Act of 2005 (EPACT05; P.L. 109-58) created two new temporary tax credits
for homeowners who made energy-efficiency improvements to their homes. Under EPACT05,
both credits were in effect for 2006 and 2007. The first credit was the nonbusiness energy
property credit (IRC §25C). Under Section 25C, taxpayers were eligible for a nonrefundable tax
credit equal to 10% of qualified expenditures, subject to certain limitations for specific types of
property. Specifically, property-specific credit limits were $50 per year for any advanced main air
circulating fan; $250 per year for any qualified natural gas, propane, or oil furnace or hot water
boiler; and $300 for electric heat pumps, geothermal heat pumps, central air conditioners, and
boilers and water heaters that met certain efficiency standards. The maximum amount of Section
25C credit that could be taken for windows over 2006 and 2007 was capped at $200. The lifetime
cap for the Section 25C credit was $500 for 2006 and 2007.29 The credit could only be applied to
improvements made to the taxpayer’s principal residence.
The second credit temporary established by EPACT05 for 2006 and 2007 was the residential
energy-efficient property credit (IRC §25D). This nonrefundable credit was calculated as 30% of
expenditures on qualified photovoltaic properties (where the sun’s energy is used to generate
28 For more information on the history of the credit in the late 1970s and early 1980s, see Robert McIntyre, “Lessons
for Tax Reformers from the History of the Energy Tax Incentives in the Windfall Profit Tax Act of 1980 ,” The Boston
College Law Review, vol. 22, no. 705 (1981).
29 In other words, if a taxpayer used $500 worth of §25C credit in 2006 for her home, she would be ineligible for the
credit in 2007, irrespective of whether she had qualifying expenses in 2007.
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electricity), solar water-heating properties (excluding those used for heating swimming pools and
hot tubs), and fuel-cell generators, subject to annual limits. Specifically, the credit for
photovoltaic and solar water-heating properties could not exceed $2,000 per year, whereas the
credit for fuel cells could not exceed $500 per year. Qualifying photovoltaic and solar water-
heating property expenditures included those made on any of the taxpayer’s residences, whereas
qualifying fuel-cell expenditures were limited to those made to the taxpayer’s principal residence.
At the end of 2007, Section 25C expired. By contrast Section 25D was extended for the 2008 tax
year by the Tax Relief and Health Care Act of 2006 (P.L. 109-432). Further, this act clarified that
all property which used solar energy to generate electricity, not just photovoltaic property, could
qualify for the Section 25D credit.
The Emergency Economic Stabilization Act (EESA)
In 2008, the Emergency Economic Stabilization Act of 2008 (EESA; P.L. 110-343) reinstated and
modified the Section 25C credit for the 2009 tax year. EESA also expanded the list of qualified
energy property to include biomass fuel stoves, which were eligible for a $300 credit. Geothermal
heat pumps were removed from the list of eligible property under Section 25C but were added to
the list of eligible property under Section 25D.
EESA extended the Section 25D tax credit for eight years, through 2016, modified it for existing
technologies, and expanded it to new technologies. Specifically, the act eliminated the $2,000
maximum annual credit limit for qualified solar-electric property expenditures beginning in 2009.
In addition, it expanded the credit to include expenditures for qualified small wind-energy
property and (as previously mentioned) qualified geothermal heat pump property. The credit for
qualified small wind energy was equal to 30% of expenditures made by taxpayers on a small
wind-energy property up to a cap. The cap was set at $500 for each half kilowatt of electric
capacity generated by a wind turbine, not to exceed $4,000 annually. The credit for qualifying
geothermal heat pumps was calculated as 30% of expenditures up to a $2,000 annual cap for this
technology. Taxpayers were eligible for the credits for both small wind-energy and geothermal
properties installed on any of their residential properties.
The American Recovery and Reinvestment Act (ARRA)
The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5) further extended and
modified the Section 25C and Section 25D tax credits. With respect to the Section 25C credit,
ARRA extended the credit for two years (2009 and 2010) and modified the calculation of the
credit to be equal to 30% of qualified expenditures for energy-efficiency improvements and
energy property, eliminating the technology-specific credit amounts.30 In addition, the aggregate
credit cap was lifted from $500 to $1,500 for 2009 and 2010 and the $200 aggregate cap for
windows was eliminated for 2009 and 2010. Hence, if taxpayers used $1,000 of credit in 2009,
their credit would be limited to $500 in 2010, irrespective if they had used this credit in 2006 and
2007. The removal of the aggregate cap for windows meant that in 2009 and 2010, taxpayers
could claim up to $1,500 in tax credits for qualified windows. Finally, ARRA generally reduced
30 The changes that ARRA made to the §25C credit in 2009 superseded the 2009 changes that had been made to the
credit by EESA.
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the efficiency standards for both energy-efficiency improvements and energy property, expanding
the availability of the credit to additional products.
ARRA also changed the Section 25D tax credit for 2009 and 2010, primarily by removing the
maximum credit caps for every type of technology except fuel cells. These changes were effective
from 2009 through 2016.
Following the changes made to the Section 25C and Section 25D tax credits under ARRA, the
number of credits being claimed and the total dollar amount of credits being claimed increased
(see Table B-1). Further, under ARRA, average credit amounts were higher than they had been
during 2006 and 2007, reflecting the higher credit rate. When the ARRA expansions expired, the
number of taxpayers claiming the residential energy credit fell, along with the total amount and
average amount of these credits.
Table B-1. Residential Energy Credits Claimed and Average Amount, 2006-2010
Number of Tax Returns
Total Amount of
Which Include Claims for
Residential Credits
Residential Credits
Claimed (Millions)
Average Credit Amount
2006 4,344,189
$1,000.15
$230
2007 4,326,398
$1,007.58
$233
2008 225,733
$216.69
$960
2009 6,711,682
$5,822.88
$868
2010 7,155,889
$6,173.49
$863
2011 3,642,988
$1,676.00
$460.06
Source: Internal Revenue Service, Statistics of Income (SOI), Individual Statistical Tables by Size of Adjusted
Gross Income, Table 3.3, 2006-2011.
Notes: The Section 25C tax credit expired at the end of 2007 and was unavailable in 2008, hence the 2008
numbers represent claims for the Section 25D tax credit. In 2011, the maximum value of the 25C credit was
lowered from $1,500 to $500.
The 2010 Tax Act (P.L. 111-312)
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (The 2010
Tax Act; P.L. 111-312) extended the Section 25C credit for one year, through the end of 2011.
However, the credit structure returned to the structure that existed prior to the enactment of
ARRA.31 Importantly, the general lifetime limit ($500) and window lifetime limit ($200) were
reinstated. Hence, if a taxpayer had claimed a total of $500 in Section 25C credits over 2006,
2007, 2009, and 2010 combined, they would be ineligible for the credit in 2011. Similarly if they
had claimed $200 in credits for windows in 2006, 2007, 2009, and 2010 combined, they would be
ineligible to claim the credit for windows in 2011. Additionally, certain efficiency standards that
were relaxed under ARRA were restored to their prior levels. Finally, the technology-specific
credit limits for energy-efficiency property were reinstated at pre-ARRA levels.
31 The Section 25C credit in 2011 applies to asphalt roofs with cooling granules and biomass stoves, changes that were
made by EESA.
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The American Taxpayer Relief Act (ATRA)
The American Taxpayer Relief Act (P.L. 112-240, ATRA) extended the 2011 parameters of the
25C credit for two additional years—2012 and 2013.
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Table B-2. Overview of Legislative Changes to the Nonbusiness Energy Property Tax Credit (§25C), 2005-2012
2005
2008
2009
2010
2012
P.L. 109-58 (EPACT05)
P.L. 110-343 (EESA)
P.L. 111-5 (ARRA)
P.L. 111-312
P.L. 112-240
Calculation of Credit
10% of Qualifying Energy-
*
30% of Qualifying Energy-
10% of Qualifying Energy-
*
efficiency Improvements +
efficiency Improvements +
efficiency Improvements +
Qualifying Energy Property
30% of Qualifying Energy
Qualifying Energy Property
(fixed by type. see below)
Property
(capped by type)
(fixed amounts by property
type eliminated)
Types of Qualifying
(1) Insulation
Added-
* * *
Energy-efficiency
(2) Windows (Including
(1) Asphalt Roof with
Improvements to
skylights)
cooling granules
Building Envelope
(3) Doors
(4) Qualifying Metal Roof
Types of Qualifying
(1) Energy Efficient Building
Added-
Properties are unchanged,
(1) Energy Efficient Building
*
Energy Property and
Property: $300
(1) Biomass fuel stoves:
but fixed dol ar amounts per
Property: $300
Credit Amount
Electric Heat Pump (air
$300
property type are
Electric Heat Pump (air
source)
eliminated.
source)
Geothermal Heat Pump
Removed-
Biomass fuel stoves: $300
Central Air Conditioner
(2) Geothermal heat
Central Air Conditioner
Natural Gas, Oil or
pumps
Natural Gas, Oil or Propane
Propane Water heater
Water heater
Electric Heat Pump
Electric Heat Pump Water
Water Heater
Heater
(2) Natural gas, propane, or
(2) Natural gas, propane, or
oil furnace: $150
oil furnace: $150
(3) Natural gas, propane or
(3) Natural gas, propane or oil
oil water boiler: $150
water boiler: $150
(4) Advanced main air
(4) Advanced main air
circulating fan: $50
circulating fan: $50
Aggregate Cap for
$200 over all prior tax
*
$200 aggregate cap for
$200 (for all prior tax years
*
Windows
years
windows removed for 2009
beginning in 2006 including
and 2010
2009 and 2010)
Aggregate Cap for
$500 over all prior tax
*
$1,500 over 2009 and 2010
$500 (for all prior tax years
*
Credit
years
(excludes expenditures in
beginning in 2006 including
2006, 2007)
2009 and 2010)
Applicable Tax Years
2006 and 2007
2009
2009 and 2010
2011
2012 and 2013
CRS-21
Source: CRS analysis of P.L. 109-58, P.L. 110-343, P.L. 111-5, P.L. 111-312, and P.L. 112-240.
Note: * Unchanged from prior law.
Table B-3. Overview of Legislative Changes to Residential Energy-Efficient Property Tax Credit (§25D), 2005-2010
2005
2006
2008
2009
P.L. 109-58 (EPACT05)
P.L. 109-432
P.L. 110-343 (EESA)
P.L. 111-5 (ARRA)
Calculation of Credit
30% of energy efficient property
* * *
(subject to maximum credit amount by
type of property , see below)
Qualifying Renewable
(1) Solar electric (photovoltaic): $2,000
Clarified that all solar electric,
Added-
Modified-
Energy Generating Property (2) Solar water heating: $2,000
not just photovoltaic property,
(1) Small wind energy: $500 per
(1) Small wind energy: max
and Max Credit Amount by
(3) Fuel Cell: $500 per 0.5kW of
qualified for the credit,
0.5kW power capacity up to
credit value eliminated
Type of Property
power capacity
$4,000
(2) Geothermal heat pumps:
(includes labor costs)
(2) Geothermal heat pumps:
max credit value eliminated
$2,000
(3) Solar water heating: max
(applicable from 2008-2016)
credit value eliminated
Modified-
(1) Solar electric (photovoltaic):
max credit amount eliminated
Aggregate Cap for Credit
None
*
*
*
Applicable Tax Years
2006 and 2007
2008
2009-2016
2009-2016
Source: CRS analysis of P.L. 109-58, P.L. 109-432, P.L. 110-343, P.L. 111-5, P.L. 111-312 and P.L. 112-240.
Note: * Unchanged from prior law.
CRS-22
Appendix C. Budgetary Impact of Residential Energy Tax Incentives
Table C-1. Revenue Losses Associated with Residential Energy-Efficiency Tax Incentives, 2008-2017
(billions of dollars)
Provision
2008 2009 2010 2011 2012 2013 2014 2015 2016
2017
Credit for Energy Efficiency Improvements to Existing
0.8 0.3 1.7 1.5 2.9 3.0 2.5 - - -
Homes (IRC §25C)
Residential Energy Efficient Property Credit (IRC
-i- 0.1 0.2 0.2 0.8 0.9 1.0 1.0 1.1 0.9
§25D)
New Energy Efficient Home Credit (IRC §45L)
-i- -i- -i- -i- -i- -i- -i- -i- -i- -i-
Credit for the Production of Energy Efficient
0.1 0.1 0.2 0.2 0.2 0.2 0.1 0.1 -i- -i-
Appliances (IRC §45M)
Exclusion of Energy Conservation Subsidies Provided
-i- -i- -i- -i- -i- -i- -i- -i- -i- -i-
by Public Utilities (IRC §136)
Source: Joint Committee on Taxation, JCS-13-1, JCS-1-12, JCS-3-10, JCS-1-10, JCS-2-08
Note: An “-i-“ indicates an estimated revenue loss of less than $50 million.
CRS-23
Residential Energy Tax Credits: Overview and Analysis
Author Contact Information
Margot L. Crandall-Hollick
Molly F. Sherlock
Analyst in Public Finance
Specialist in Public Finance
mcrandallhollick@crs.loc.gov, 7-7582
msherlock@crs.loc.gov, 7-7797
Congressional Research Service
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