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Senate Finance Staff Discussion Draft: Energy Tax Incentives

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A number of general principles are embodied in this proposal, with negative consequences for housing and real estate measured against present policy.

First, the proposed approach would clearly favor energy production over energy conservation and retrofitting. Improving existing buildings, or constructing energy-efficient properties with long-run benefits for potential future owners, is an approach that is rewarded under the existing tax credit system.

Second, the proposed tax benefits for energy production appear to exclude homeowners and perhaps some rental housing and commercial real estate owners. The proposed legislative drafts indicate that for a taxpayer to qualify for the investment credit (as homeowners can do now under the 25D credit), the installed property must be eligible for depreciation. Homeowners do not claim depreciation deductions, so it appears power produced by an owner-occupied home would not be eligible. Furthermore, to qualify for the first tax credit noted above, any electricity produced on site must be sold to either an unrelated party or metered and monitored by a third-party. This rule may exclude some apartment and commercial real estate owners from the proposed tax rule for on-site power production.

If this preliminary analysis is correct, excluding on-site power production is a policy mistake given such production does not suffer from transmission losses. According to the Department of Energy’s Energy Information Administration (EIA), “annual electricity transmission and distribution losses average about 7 percent of the electricity that is transmitted in the United States.”

Source: “Eye on Housing” NAHB blog

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