Victim of Tax Credit Myopia: Energy Conservation

Tax incentives for energy conservation have been around for more than 25 years with the first such incentive established by the 1976 legisalture for solar water heating systems.
Over the years, the credit has been extended to wind energy devices, heat pumps, and ice storage systems. The amount of the credit varies depending on the type of alternate energy device purchased and installed. The current credit amounts range from 20% for heat pumps and wind energy devices to 35% for solar energy devices to 50% for ice storage systems.
Although the original concept was to offer the credits as an incentive to encourage taxpayers to utilize alternate energy sources for a limited period of time beacuse the cost was relatively high, the credit has become a perpetual part of the state tax law. A couple of years ago when the governor signed the latest extension of the sunset date for these credits, he warned that this was the last time he would do so and threatened to veto any future attempts to extend the sunset date.
As part of the legislation which extended the sunset date for alternate energy tax credits, a task force was to be formed to address the issues encouraging efficient use of energy, consider participation in the federal Million Solar Roofs program, and make recommendations on the most cost effective means for increased energy efficiency. That legislation became effective on July 1, 1998. The task force is to report to the legislature no later than January 1, 2002.
It has been nearly three years and the task force is only now being constituted. Maybe it is just a matter of procrastination but more likely it is the fact that the deadline to make a report is looming on the horizon. Recent meetings of the task force have been more focused on preserving some sort of tax incentive. For years, the solar industry has pushed for extensions of the tax credit, however, in view of the fact that the governor has threatened to veto any extension of the credit, it would seem that the task force needs to come up with another means of encouraging residents to “buy-in” to the use of alternate energy.
For years, the Tax Foundation has pointed out that the tax credit approach really limits the benefit to those who can afford to purchase solar water heating units. Thus, if a family cannot afford the $4,000 to $5,000 cost of the solar unit, it will not be able to claim the 35% tax credit. Thus, the credit goes only to those taxpayers who have the means to acquire the solar energy device. The low and lower-middle income families will never be able to make that purchase unless there is some other kind of program that will enable them to make the purchase.
One alternative that the Tax Foundation has offered for more than ten years is a loan program that could be run through the local utility using financing that would be provided with the proceeds of state bonds. If the state declared the widespread use of alternate energy as a matter of public policy, the state could issue general obligation bonds where the proceeds could be used to fund a loan program. Utility users could then apply for the loan, make the purchase of the solar heating device, and pay the amount of the loan back through their monthly utility bill.
The amount of the repayment could be equal to the amount of the cost savings that would be realized as a result of using the solar heating device. For example, if a family’s monthly electric bill was $160 before installing the solar device and the installation of the solar device cuts that amount in half to $80, the repayment amount could be set at $80 a month which would then equal the utility bill prior to the installation. With a payment of $80 a month, a $4,000 solar heating device could be paid off in about four years. While the family would not see an immediate drop in their utility bill, at the end of the pay-back period they would see a dramatic drop in cost. What would make it even more attractive is if the loan was interest free.
The alternate energy tax credit current costs the state treasury about $4.7 million each year. If that amount could be used to pay the interest on bonds issued for such a loan program, the state could issue as much as $60 to $70 million for the loan fund at today’s interest rates. Thus, the loans could be made interest free.
It would seem that if families could acquire these alternate energy devices at no cost to their monthly budgets, there would probably be more people who would make the move to alternate energy use. Maybe it is time to rethink the continuation of the alternate energy tax credit in favor of a no-interest loan program.