Every public policy benefits some people more than others – and energy policy is no exception. A new paper from Severin Borenstein and Lucas Davis, two professors at UC Berkeley, examines which taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. payers benefit most from tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s for clean energy:
“Since 2006, U.S. households have received more than $18 billion in federal income tax credits for weatherizing their homes, installing solar panels, buying hybrid and electric vehicles, and other “clean energy” investments… We find that these tax expenditureTax expenditures are a departure from the “normal” tax code that lower the tax burden of individuals or businesses, through an exemption, deduction, credit, or preferential rate. Expenditures can result in significant revenue losses to the government and include provisions such as the earned income tax credit (EITC), child tax credit (CTC), deduction for employer health-care contributions, and tax-advantaged savings plans. s have gone predominantly to higher-income Americans. The bottom three income quintiles have received about 10% of all credits, while the top quintile has received about 60%.”
While the federal tax code contains over two dozen provisions relating to energy, most of them are aimed at businesses, not households. In this paper, on the other hand, Borenstein and Davis focus specifically on the four most significant clean energy tax credits that apply to households:
- The Nonbusiness Energy Property Credit, which is available to homeowners who make their homes more energy-efficient through insulation, energy-efficient windows, and similar improvements. The credit covers 10% of the cost of these home improvements, up to a lifetime limit of $500.
- The Residential Energy Efficient Property Credit, which is available to homeowners who install renewable energy equipment in their homes, such as solar panels and wind turbines. The credit covers 30% of the cost of these energy installations.
- The Alternative Motor Vehicle Credit, which is available to consumers who purchase fuel cell vehicles. The credit begins at $4,000 and varies by vehicle.
- The Qualified Plug-in Electric Drive Motor Vehicle Credit, which is available to consumers who purchase electric vehicles and plug-in hybrids. The credit begins at $2,500 and varies by vehicle.
Borenstein and Davis find that all four of these credits are disproportionately claimed by high-income Americans. The credit for electric vehicles is most skewed towards high-income households, with the top 20% of taxpayers claiming 90% of all electric vehicle credits.
Near the end of the paper, the authors compare the distributional effects of these clean energy tax credits with the expected distributional effects of a tax on carbon emissions. They find that “a carbon taxA carbon tax is levied on the carbon content of fossil fuels. The term can also refer to taxing other types of greenhouse gas emissions, such as methane. A carbon tax puts a price on those emissions to encourage consumers, businesses, and governments to produce less of them. would be would be disproportionately paid by high-income households, while clean energy tax credits are disproportionately received by high-income households.”
According to the professional services firm, KPMG, the United States has more clean energy provisions in its tax code than any other major economy. While most major industrialized nations use energy provisions in their tax codes mainly to penalize emissions, the U.S. has one of the only tax codes that focuses instead on subsidizing clean energy. The four provisions included in Borenstein and Davis’s paper fit into this larger story – of a national energy tax policy geared mainly towards subsidies.
Three of the clean energy tax credits examined by Borenstein and Davis will be up for Congressional renewal over the next few months. The credits for energy-efficient home improvements, fuel cell vehicles, and electric vehicles all expired on January 1st of this year, and are part of the tax extenders bill recently prepared by the Senate Finance Committee. In addition, the credit for residential renewable energy equipment is set to expire at the end of 2016. As Congress considers the future of these clean energy tax credits, Borenstein and Davis’s new research will shed additional light on which taxpayers benefit most from these provisions.Share