Although the tax bill passed by Congress today will bring the largest changes to taxes (and government revenue) seen in decades, we don’t expect the bill to have such a dramatic impact on energy efficiency.
The greatest impacts, both positive and negative, will likely come from the broad changes to tax and revenue. Some companies and families will have more money to spend on efficiency improvements (or on energy-using activities) as a result of the tax cuts; others will have less. The deduction for state and local taxes will be capped, which could make it more difficult for state and local governments to invest taxpayer dollars in efficiency upgrades and programs. Federal deficits will go up, which could increase pressures to cut agency spending, including on efficiency programs.
In addition, two specific provisions will have a relatively direct impact on energy efficiency investments, also both good and bad:
- The bill eliminates one type of support for state and local energy efficiency and clean energy projects by ending authority for new tax credit bonds, including Qualified Energy Conservation Bonds (QECBs), effective January 1. QECBs are state and local bonds subsidized by the federal government that finance energy efficiency improvements to public buildings, green community programs, mass commuting, and certain renewables projects. As of May, $1.3 billion in QECBs had been issued, but $1.9 billion in additional authority remained.
- It also expands business expensing by raising the cap on deductible business investments to $1 million, and makes HVAC equipment and roofs installed in commercial buildings eligible. Although businesses depreciate, or capitalize, most investments over a number of years, they can expense investments including computers and equipment—and now HVAC systems and roofs—up to the cap, deducting the full cost from taxable income in the first year. Unlike in the earlier House-passed bill, there is no efficiency requirement, but the new equipment and roofs will generally be more efficient.
At least as important to energy efficiency is what the bill will not do. A number of other provisions, once again both good and bad, were in the earlier House-passed bill but were dropped in the final negotiations:
- The bill does not extend the orphaned tax credits for combined heat and power, fuel cells, ground source heat pumps, and other technologies that were left behind when the tax credits for wind and solar power were extended. The proposed extension has now been pushed to discussion of a broader tax “extenders” bill.
- It does not end the tax credit for plug-in electric vehicles, a credit that supports continuing innovation and market growth.
- It does not end private activity bonds, tax-exempt bonds that are used to finance low-income housing and some energy efficiency improvements, among other purposes.
The new year is just days away, and will likely bring additional tax efforts, including the potential extenders bill. That bill could propose extending expired tax incentives for efficient home improvements, new homes, and new and improved commercial buildings, in addition to the orphaned tax credits mentioned above.
We will continue to work to advance energy efficiency through tax policy.