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Green and Taxes
Jeremy Faludi, 12 Jan 06


H&R Block throws US eco-consumers a bone this year in their tax advice: Of their dozen categories of advice to save money on your taxes, one is "Going for the Green". Honestly, it's a pretty pathetic bone--more of a gizzard, really--because it only talks about tax breaks for buying a hybrid vehicle, and ignores the plethora of other tax breaks related to using renewable energy and energy-efficiency in your home or office. At least someone there tried, though. Thankfully, the EPA has a page listing all the great goodies you can deduct.

Solar tax credits, for instance, are at an all-time high for the IRS. You can deduct 30% of the cost of a residential solar installation (capped at $2,000). This includes not just photovoltaics, but solar water heaters (which are much more affordable and quite underused), solar hybrid lighting, and concentrating solar power. You get a 30% credit for fuel cell installation, too (up to $1000 per kW). There are also a slew of deductions for installing better windows, roof, and heating / AC system in your home; some of them credit you 10% of the purchase price, others are fixed dollar amounts. ...And notice that these aren't tax deductions, they're tax credits--meaning the money comes straight off your tax burden, it's not merely used to recalculate your tax. (Credits are often more than three times as beneficial as deductions, depending on your income.) In addition, many of these credits can be used twice, both by the end-user of the home or office as well as the company installing them. This is the first time individual homeowners have gotten tax breaks for efficiency and green power in 20 years--ever since Jimmy Carter's energy bill, they've been commercial only. Of course, in the 2005 law, commercial buildings still do quite well.

Commercial buildings can claim all the credits residential buildings can, plus a tax deduction of $1.80 per square foot if they reduce annual energy cost by 50% compared to a standard benchmark building. And as the Florida Solar Energy Center points out, a similar break exists for ordinary people building a new home: they get a tax credit of $2000 if they save 50% on annual energy cost, and $1000 if they just save 30%. Businesses can also get credits for 10% of the price of installing microturbines (backyard windmills) or geothermal electric.

And these are just the federal tax breaks. Many states and local utilities or municipalities have their own incentives. For further info on state and local tax breaks, check out the Database of State Incentives for Renewable Energy (DSIRE). If you want a real-world example of how much money you could save on a project, the San Diego Regional Energy Office has a report on a PV solar installation (a big one--30kW) that cost less than 30% of its sticker price due to all the credits and incentives. And that was when the federal credit for solar was 10%, not 30% like it is now. Forbes also has some good back-of-the-envelope numbers on what you as a homeowner might save for different situations.

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Hold on... solar at 10% of the sticker price? I'm all for levelling the playing field against fossil fuels, but this doesn't really feel right.

I'd rather stop subsidies to fossil fuels and tax for externalities than introduce yet another market distortion of that magnitude. The Japanese had a sensible program, where the subsidy was progressively weaned... 70-90% subsidies are simply absurd.

Posted by: Daniel Haran on 12 Jan 06

The tax website from H&R Block also points out another green tax break (from the survey on the top right):

"The IRS allows you to deduct organic food as a medical expense. As a medical deduction, you can write off the difference between the cost of chemical-free food and its equivalent in "regular" food."

That leaves me more money to save up for my next tax-deduction-supported green purchase.

Posted by: Nick Fassler on 12 Jan 06

There may be some misunderstanding, Daniel -- the former 10% credit and current 30% credit are how much of a discount you get. You still pay most of the sticker price.

And if the subsidies seem overly generous to you, consider what Forbes reported:

In the new energy law, the U.S. Congress lavished tax breaks on its usual fossil-fuel favorites -- there's $1.6 billion in tax credits for new coal technology, $1 billion for gas distribution lines, another $1 billion for oil and gas exploration costs, $400 million for oil refineries, and so on.

But the solar energy industry is betting that its comparatively tiny share of the energy bill spoils will be enough to jump-start the industry.

The cost of the solar tax breaks to the U.S. Treasury -- less than $52 million out of a $14.5 billion energy package -- may seem trifling. But the handout shows that Washington supports solar, and that should encourage more states to offer breaks too, solar supporters say.

Posted by: Jeremy Faludi on 12 Jan 06

Fossil fuels get tax breaks mainly as pork projects to lure said companies to invest more money in certain congresscritters back yards.

Since generaly any fossil fuel investment is a huge amount of money the congress critters fight over it like crazy. Even a small project from oil standards can mean a ton of jobs for many years a seal a condidates election.

It isnt that they hate solar its that solar is small SPECIALY in the big pork states who control most all of said funds.

ALSO combined with that some pipline projects have litteraly been in the works longer then the solar industry has been around and ONLY now have made it to funding.

Posted by: wintermane on 12 Jan 06

The Carter era solar tax credits did more harm than good, in my opinion. The tax credit, 40% of the installation cost, mainly inspired fly-by-night vendors selling equipment overpriced by about, um, 40%. My friend Alex Wilson, publisher of "Environmental Building News" and former director of the American Solar Energy Association, agrees. He points out that the tax credit - if there should be one at all - should be for each unit of power produced, not the installation cost of the equipment. The tax credit shouldn't be for the solar water heater or photovoltaic array; it should be for the therms or kilowatt-hours produced.

But if we're going to do that, we should also give a credit for every kilowatt-hour or therm saved through efficiency improvements. How to measure that is anyone's guess.

All in all, I favor eliminating all energy subsidies except basic R&D. We've tried just about every energy policy except letting honest, transparent markets work.

Posted by: David Foley on 13 Jan 06

Hi Jeremy. The sentence that made me see red was "n addition, many of these credits can be used twice, both by the end-user of the home or office as well as the company installing them."

Here in Nova Scotia, Canada, a local fund allows 30% provincial tax credit, while also being eligible for your RRSP (IIRC, a 401(k) equivalent). Not only that, the provincial government guarantees a portion of the investment- meaning a person in a high tax bracket has only 10% exposure. Even if after 4-5 years they cash out a zero-growth fund, they still made a healthy return.

The Production Tax Credit for wind already made wind competitive a couple of years ago; and that was just to "level the playing field". As David Foley intimated, the only thing we're not levelling is conservation and efficiency improvements. The whole economy is skewed by these tax breaks.

If solar and wind take over, pork schemes for coal and oil will dwindle. Still, the whole thing seems utterly bizarre and wasteful.

Posted by: Daniel Haran on 13 Jan 06

Well as I said any oil project means alot of jobs and money for whoever lands it.

So any time a pipeline is built or a thingy is put in every congresscritter worth voting for will try and see if they can get it built through or on thier area.

Thats how a hell of alot of jobs get decided.

Even a small project can provide enough jobs to save a teetering town and garner a fair number of votes.

Posted by: wintermane on 13 Jan 06

If you are a NY reader, I have a post up on why 2006 might be the best time to consider solar PV for your home. Tax and grant incentives have been increased. In New York, you also gain an advantage if your home has been certified Energy Star of $0.50 per watt (installed).

Posted by: baloghblog on 13 Jan 06

David Foley, excellent point about how to structure tax breaks properly so they'll encourage real production, not just expensive installations by shifty companies. You'll notice the fuel cell credit is, in fact, structured thay way: $1000 per kW.

And the efficiency credits are there, comparing buildings & homes to EPA-codified benchmarks on a per-square-foot basis. (The EPA has built up enough data over the years that they have a solid notion of what an average home, office, warehouse, lab, etc. use.) And while those tax breaks aren't $ / kW saved, they do have the two-threshold system at least. Maybe it's easier to administer. But yeah, a $-per-negawatt system would be nicer.

Daniel Haran, I think there may be a misunderstanding: the US tax breaks aren't on stocks or mutual funds or whatever, they're on home improvements, building retrofits, the car you drive, etc.

Posted by: Jeremy Faludi on 13 Jan 06

The problem is the only way congress critters can look effective is by landing such projects and the ONLY tool they realy have to land such things is public money.

Because in the end unless a congress critter lands something worth jobs and money no one realy cares and that is the death of a politician's career.

Posted by: wintermane on 14 Jan 06

There are other kinds of incentives too. Years ago, I was able to convince 2 small Maine banks to offer a lower interest rate on mortgages if the homes were built to a voluntary efficiency standard. The idea was that someone's a better credit risk if they aren't shelling out so much for their fuel and electric bills. When those 2 small banks were taken over, the mortgage program died. I understand that "green" mortgages are available now, at least in theory. There's supposed to be a program linked to "Energy Star" homes here in the US of A. I wish this were a widespread practice.

Posted by: David Foley on 15 Jan 06



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