Abstract
The Inflation Reduction Act of 2022 recently extended two residential energy tax credits, the Residential Energy Efficient Property (REEP) credit and the Nonbusiness Energy Property (NEP) credit, through 2034 and 2032, respectively. In this paper, we provide an updated description of credit take-up and tax expenditures over the past 15 years, showing how the tax expenditure on the REEP credit has rapidly grown while the tax expenditure on the NEP credit has declined. Within the REEP credit, we document a large increase in solar electric claims over time. Additionally, we examine the income distribution of credit takers and geographic heterogeneity of credit take-up using IRS individual tax data. Both tax credits primarily benefit higher income taxpayers.
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The raw data required to reproduce findings derived from IRS SOI data can be found at https://www.irs.gov/statistics/soi-tax-stats-statistics-of-income. The raw data required to reproduce other findings are confidential and cannot be shared.
Notes
The NEP credit was extended to 2032, and the REEP credit was extended in its current form through 2032, followed by a phase-out through 2034. Further extensions would require congressional action.
We are not able to exactly replicate Borenstein and Davis (2016)’s results using the IRS administrative data due to limited overlap between the available time periods.
This statistic is specifically based on tax filers and excludes individuals who do not file a tax return. Thus, it overstates the percentage of households who may be able to claim a residential energy credit.
However, biomass stoves will become eligible for the NEP credit in 2023.
Small wind projects briefly had a kilowatt capacity requirement in 2008 only.
The Bipartisan Budget Act of 2018, passed in February 2018, extended the credit retroactively for 2017, which likely impacted take-up that year. H.R.1865 – Further Consolidated Appropriations Act, 2020 (passed December 2019) retroactively extended the NEP credit for 2018 and 2019. While the extensions for 2017 and 2019 were passed prior to the date on which most taxpayers were required to file, taxpayers wanting to take the NEP credit in 2018 would have needed to file an amended return to claim the credit.
The Inflation Reduction Act of 2022 also changed some of the qualifying activities and added additional reporting requirements (McDermott 2022).
The percentage increased to 30 percent again in 2023, and now applies to more qualifying activities.
See “Data” for details on the sample period, which is 2006–2020 for one of our datasets and 2014–2021 for the other.
Following the Inflation Reduction Act of 2022, qualifying activities are building envelope components (such as windows and doors), home energy audits, residential energy property (which includes air conditioners, water heaters, and furnaces), heat pumps, and biomass stoves or boilers.
We conducted line-item checks comparing the IRS administrative data to SOI aggregate data, finding them to be comparable for all years after 2014.
In fact, according to SOI data, e-filers represent 86 percent of all filers in 2014, rising to 92 percent by 2020.
SOI does not provide coefficients of variation (standard errors) for the Form 5695 line item estimates, and thus, we omit error bars from all charts derived from SOI data due to this data limitation.
The changes to NEP from the Inflation Reduction Act of 2022 eliminated the lifetime cap.
The Inflation Reduction Act of 2022 increased the annual limit to \(\$ \)1200 for most taxpayers.
The average REEP credit claimed between 2006 and 2020 was \(\$ \)3590 (in 2023 dollars), compared to NEP’s lifetime cap of \(\$ \)500 (nominal) in most years.
In order to attribute tax expenditures to specific qualifying activities, this analysis assumes no carryforward of the REEP credit. In fact, carryforward is quite common with the REEP credit, as seen in Fig. 11. As long as discount rates are low and taxpayers eventually claim the credits they carry forward, this does not present a problem to our analysis.
We do not examine NEP expenditures by qualifying activity due to the fact that NEP qualifying activities having credit maximums that frequently bind.
Note that the data used here contain all Forms 5695 e-filed between 2014 and 2021. For that reason, we do not add error bars to the charts. However, the cutoffs between income quintiles are calculated using a 5 percent sample of US tax filers and may be subject to sampling error. We expect this sampling error to be small.
Note that due to the ability to carry forward the REEP credit, taxpayers with zero tax liability but an expectation of future tax liability would still have an incentive to claim any qualifying costs for the REEP credit.
In addition to the overall lifetime maximum credit of \(\$ \)500 during our sample period, various qualifying activities have individual maximums, such as \(\$ \)50 for “advanced main air circulating fan[s]” and \(\$ \)150 for “qualified natural gas, propane, or oil furnace or hot water boiler[s].”
The second lowest quintile receives between 0.8 percent and 5 percent of tax expenditures, the middle quintile between 7 percent and 16 percent, and the second highest quintile between 25 percent and 30 percent of tax expenditures in any given year in our sample.
The denominator in Fig. 12 includes both new REEP claimants and taxpayers who had a REEP carryforward from the previous year. The numerator includes any eligible return that carried any positive amount into a future tax year.
Note that this analysis is limited to tax filers whom we observe for 4 or more years.
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This research was conducted while one of the authors was an employee at the United States Department of the Treasury. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors and do not necessarily reflect the views or the official positions of the United States Department of the Treasury. Any taxpayer data used in this research was kept in a secured IRS data repository, and all results have been reviewed to ensure that no confidential information is disclosed.
Appendix A: Additional results
Appendix A: Additional results
Here, we examine growth rates in uptake across states in the 2014 through 2021 time period (excluding 2018 for NEP). Figure 15 shows (negative) growth rates for NEP; all states saw decreases in NEP take-up, ranging from a 74 percent decrease in West Virginia to a 36 percent decrease in California. Regionally, the West Coast (including Hawaii) and portions of the Mid-Atlantic had the smallest decreases.
Growth rate in NEP uptake (per tax filer) from 2014 to 2021 (excluding 2018). Source: Authors’ construction from IRS individual tax returns for e-filers
Growth rate in REEP uptake (per tax filer) from 2014 to 2021. Source: Authors’ construction from IRS individual tax returns for e-filers
Figure 16 shows growth rates in REEP uptake across states. Here, there is substantial heterogeneity. Eleven states saw decreases in uptake, with Hawaii having the largest decrease of 53.5 percent. The remaining states saw increases in uptake, with 11 states seeing increases of over 100 percent, including an increase of 239 percent in Rhode Island. Regionally, the highest growth rates were seen in the Mountain West, and the largest decreases in the Great Plains and the Midwest.
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Coyne, D., Globus-Harris, I. A review of US residential energy tax credits: distributional impacts, expenditures, and changes since 2006. J Environ Stud Sci (2024). https://doi.org/10.1007/s13412-024-00918-0
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DOI: https://doi.org/10.1007/s13412-024-00918-0