By restoring a little-known tax policy for energy efficiency upgrades to commercial buildings, the U.S. could create as many as 77,000 jobs annually over the next decade and boost the economy by billions of dollars, according to a new analysis released today. The tax policy encourages smarter energy use in commercial buildings, which account for nearly a fifth of U.S. energy consumption.
Section 179D of the tax code, which offers a tax deduction to building owners and businesses for energy efficiency improvements, expired at the end of last year. The study from Regional Economic Models Inc. (REMI) confirms that reinstating this benefit makes good economic sense. Aside from creating jobs, the incentive could add $7.4 billion annually to the GDP while lowering utility bills and cutting pollution.
The 179D incentive, also known as the Energy Efficient Commercial Buildings Deduction, has expired and been revived many times since it passed as part of the Energy Policy Act of 2005. It offers up to $1.80 per square foot for upgrades at new or existing buildings that cut the total energy and power cost by at least 50 percent compared to a building meeting the standard ASHRAE (American Society of Heating, Refrigerating, Air-Conditioning Engineers) baseline for energy efficiency. Improvement areas might include lighting, heating and cooling, hot water systems, ventilation, or the building envelope, such as insulation or windows.
This policy is beyond cost-effective, paying for itself many times over in terms of energy savings, jobs, and economic benefits, the REMI study shows.
The study looked at the economic impact of three approaches to reviving the energy efficiency credit based on proposals recently pursued:
- First, modernizing the ASHRAE baseline standard, raising the deduction to $3 per square foot and permanently extending the 179D deduction would cost $6.7 billion over 10 years, yet it would deliver more than four times that amount in energy savings. The study says, in addition to boosting gross domestic product by $7.4 billion, it would also increase personal income by $5.7 billion and add close to 77,000 jobs annually in areas including construction and manufacturing.
- Simply renewing the 179D expired deduction as-is—another option analyzed in the study—would create nearly 41,000 jobs annually over the next decade.
- A third option, which would be to reinstate the previous deduction while extending it to tribal governments and nonprofits such as hospitals and schools, would create a comparable number of jobs.
Efficiency: “An underappreciated opportunity”
Energy efficiency continues to be an underappreciated opportunity for businesses to cut costs and power the economy. For owners of commercial buildings, chasing a higher energy efficiency standard isn’t always a priority, given the tenant, not the owner, is usually responsible for the energy bills. Tax incentives like 179D help overcome this well-understood market failure by offsetting the upfront costs of enhancements that, in the long term, can cut energy costs and boost a building’s market value.
Properties don’t have to reach the 50 percent energy savings goal to qualify for a deduction. They can also partially qualify by meeting lower targets with specific improvements (a 25 percent reduction in energy use and costs achieved with lighting changes, for example) for a $0.60 per-square-foot deduction. This commonsense provision recognizes that building permits and construction often pertain to just one or two systems rather than the whole building.
Beyond just reinstating Section 179D of the tax code, lawmakers should improve it by updating the baseline to a more recent code for new construction and by allowing existing buildings to compare energy reductions to past performance rather than to a reference building. This would make the deduction more effective.
At the same time, expanding eligibility to include nonprofits and tribal governments could increase the scope of valuable efficiency improvements that make our buildings run smarter. Energy efficiency upgrades offer welcome relief to commercial building owners and tenants, who spend an estimated $38 billion a year on lighting alone. They also relieve the strain on power grids during peak periods, reducing demand and bolstering reliability for everyone.
As Congress looks for ways to strengthen the economy and boost job growth with tax code reform, it shouldn’t overlook proven incentives like Section 179D, which can help drive a clean energy economy that is already 3 million jobs strong.