Members of Congress are introducing legislation to modernize and extend home energy efficiency tax incentives that lapsed in 2017. If passed, the tax code will once again include powerful inducements to cut energy waste. As we celebrate Energy Efficiency Day today, we encourage Congress to pass these common-sense incentives for homeowners to lower their energy bills and make their residences more comfortable.
The first proposal, introduced last week in the House and Senate by Sens. Maggie Hassan (D-NH) and Susan Collins (R-Maine) and Reps. Jimmy Gomez (D-Calif.) and Mike Kelly (R-Pa.), aims to modernize the Section 25C Nonbusiness Energy Property Credit for homeowner energy efficiency improvements. Separately, the same lawmakers will also introduce a proposal on the Section 45L Energy Efficient Home Credit when Congress returns to session on October 15.
Momentum for a tax package is growing within Congress, and with good reason. Efficiency incentives for home improvements increased under the American Recovery and Reinvestment Act, also known as the stimulus act, and nearly 7 million taxpayers claimed them in 2010. But the incentives dropped to pre-stimulus levels in the years that followed, falling to just 2.2 million in 2015.
Now is a crucial time to resurrect these incentives, particularly as the Trump administration continues its push for more climate-polluting fossil fuels while attempting to undo the excellent and important progress made on energy efficiency. One important note: NRDC supports comprehensive clean energy tax reform, and we’d prefer to see longer-term extensions of these important credits, increasing in stringency over time. While these credits are improvements over nothing, and certainly better than retroactive credits that do nothing to incentivize efficient choices, there is still room for improvement.
Prior to expiring at the end of 2017, the 25C incentive provided a 10 percent tax credit for the purchase of certain home energy-efficient upgrades up to $500. The new proposal increases incentives to provide a 15 percent tax credit up to $1,200, and also raises or eliminates some individual product category caps, which would allow homeowners to do multiple projects. For perspective on the difference these incentives can make, homeowners who invested in clean energy improvements in 2015 claimed more than $1.6 billion in tax credits, with more than two-thirds of the benefits going to households with incomes under $100,000.
Similarly, the expired 45L incentives used to offer builders up to $2,000 for constructing new homes that used 50 percent less energy for heating and cooling than 2006 building codes, as well as a $1,000 tax credit for new manufactured homes that achieved 30 percent energy savings for heating and cooling or met ENERGY STAR® requirements.
The original 45L proposal under consideration, backed by manufacturers and a broad coalition of environmental and efficiency groups, including NRDC, would have raised the maximum credit to $2,500 for new homes that meet requirements. However, following negotiations with homebuilders and others, the proposal will now maintain the status quo for 2020, and in 2021-2022, allow the homebuilder to choose from two options: $2,500 for reducing energy consumption by 60 percent for heating and cooling compared to the 2006 International Energy Conservation Code (IECC) energy code baseline, or $2,500 for achieving 15 percent improvement of whole home energy consumption compared to the 2018 IECC baseline. In the time since 45L was first enacted in 2005, the number of homes that qualified by reducing energy consumption by 30 to 50 percent on heating and cooling rose from less than 1 percent to around 11 percent.
The residential and commercial sector accounts for 40 percent of U.S. energy consumption, meaning that failing to update these incentives now will result in energy waste and unnecessary carbon emissions for decades into the future because homes and buildings constructed or renovated now will still be around in 50 to 100 years, and energy-intensive equipment like air conditioners and furnaces will be used for a decade or longer.
Improved efficiency, on the other hand, will save businesses and consumers hundreds of millions of dollars annually on energy bills, lower the demand on the utility grid, and make the U.S. more economically competitive. The International Energy Agency reports that efficiency alone can account for at least 40 percent of the emissions reductions needed to meet global targets, and a report by ACEEE estimates that efficiency can get us halfway to our goals. Restoring and improving these incentives will offer a bipartisan opportunity that would achieve a wide range of goals.