GAO Report on the 25C Energy Tax Credit Misses the Big Picture


Last week, the Government Accountability Office – the audit and evaluation agency of the U.S. Congress – issued a report on the energy-efficient home tax credit, sometimes called the section 25C tax credit. The program rewards homeowners with a tax credit if they make energy-efficient upgrades to their homes. In 2009 and 2010, the tax credit was capped at $1,500. For 2011, the lifetime limit was reduced to $500. The credit expired at the end of 2011.

NAHB has previously examined who claimed the 25C credit, how the credit was used in terms of qualifying products, and the importance of the credit in supporting remodeling spending during the Great Recession.

As enacted, the credit is based on amounts paid for energy-efficient upgrades, rather than the realization of energy savings (performance based), although installation of qualifying upgrades by definition results in improvements of a home’s energy use.

The GAO report on the 25C credit concluded that a performance-based system would provide somewhat greater policy benefits. However, it correctly noted that the administrative cost of a performance-based system (e.g. home energy testing paid for by the homeowner and additional IRS oversight) would be greater for the government and homeowners, perhaps yielding no net benefits.

The rest of the report examined possible changes to the tax rules of 25C. In particular, GAO examined what impacts a floor or base would have on the distribution of credit claims. Under these rules, a taxpayer could only claim the credit for qualified product expenditures in excess of certain thresholds, perhaps defined as a percentage of adjusted gross income. In practice, it would be a very difficult for most taxpayers to calculate what exactly their tax credit would equal under the examined modifications.

In fact, data in the GAO report indicate why both the performance based system and the base/threshold proposal would be counterproductive for the 25C program. The number of taxpayers participating in the 25C tripled from 2008 to 2009. This occurred because legislative changes made by the 2009 stimulus bill made the credit more valuable and simpler to understand. The modifications discussed by GAO in the report would clearly complicate the program, thus lowering participation and undermining its policy objective of improving the energy-efficiency of the nation’s housing stock.

Surprisingly missing from the report is a discussion of the primary challenge for the 25C program: the fact that the tax credit expired at the end of 2011 along with a host of other tax provisions collectively known as the “tax extenders. Failure to extend the 25C tax credit undermines a successful policy that created jobs in the hard hit residential construction sector and yielded long-term gains for homeowners’ energy bills.

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