As illustrated in Figure 2 , residential energy use per capita had remained relatively constant since the 1970s. There is some debate, however, about the optimal level of investment in energy efficiency. The first credit, the nonbusiness energy property tax credit (IRC §25C), allows taxpayers to claim a tax credit for energy-efficiency improvements they make to the building envelope (insulation, windows, doors) of their primary residence and for the purchase of high-efficiency heating, cooling, and water-heating appliances they purchase for their primary residence. The maximum value of the credit is capped at $500. The amount of the credit is calculated as a percentage of expenditures on technologies that generate renewable energy, including labor and installation costs. For 2017, the credit rate is 30%. Information on the current budgetary effects of Section 25C and Section 25D can be found in Appendix C .

	The Economic Rationale for Residential Energy-Efficiency Tax Credits

A rational consumer would be expected to invest in an energy-efficiency technology if the savings that resulted from using the property were greater than the cost of the property. Although the two tax credits analyzed in this report are designed to encourage additional investment in residential energy-efficient property in existing homes, they may not rectify other existing market failures, limiting their ability to increase usage of energy-efficient technologies to their optimal or economically efficient levels. Finally, the Treasury Inspector General for Tax Administration (TIGTA) has identified administrative issues with the current tax benefits for residential energy efficiency. Tax credits that reward consumers for residential energy-efficiency investments, rather than lead consumers to make additional residential energy-efficiency investments, provide a windfall gain to credit recipients without resulting in additional economy-wide energy-efficiency investment or reduced energy consumption. For example, estimates suggest that in 2017, 44% of U.S. households had no federal income tax liability, meaning that tax credits for energy-efficiency investment do not provide a current financial incentive for such investments for these taxpayers. The purpose of residential energy-efficiency tax incentives is to increase investment in energy efficiency and properties that generate renewable energy. By definition, the value of a nonrefundable credit cannot exceed a taxpayer's tax liability. Residential energy-efficiency tax incentives tend to be limited to higher-income taxpayers, which may undermine one of the policy rationales behind using tax credits to motivate energy-efficiency investments. Policy Options27

The Section 25C and Section 25D tax credits are temporary provisions and one policy option available to Congress is to allow these tax credits to expire as scheduled. Absent congressional action, the Section 25C credit expired at the end of 2017 and the Section 25D credit expires at the end of 2021, respectively. There may be other policy options Congress might want to consider regarding future incentives for residential energy efficiency, including modifying the credits or replacing them with a grant program. Allow Tax Credits to Expire as Scheduled

One option regarding these credits is to let them expire as scheduled. Extend or Modify Current Tax Incentives

Policymakers may choose to extend, expand, or otherwise modify residential energy-efficiency tax incentives. Legislative History
Tax credits for residential energy efficiency were first introduced in the late 1970s. The first credit was the nonbusiness energy property credit (IRC §25C). The American Recovery and Reinvestment Act (ARRA)
The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5 ) further extended and modified the Section 25C and Section 25D tax credits. With respect to the Section 25C credit, ARRA extended the credit for two years (2009 and 2010) and modified the calculation of the credit to be equal to 30% of qualified expenditures for energy-efficiency improvements and energy property, eliminating the technology-specific credit amounts. 111-312 )
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (The 2010 Tax Act; P.L. The American Taxpayer Relief Act (ATRA)
The American Taxpayer Relief Act (ATRA; P.L. 112-240 ) extended the 2011 parameters of the Section 25C credit for two additional years—2012 and 2013. The Tax Increase Prevention Act (TIPA)
The Tax Increase Prevention Act (TIPA; P.L. The Protecting Americans from Tax Hikes Act (PATH)
The Protecting Americans from Tax Hikes Act (PATH Act; Division Q of P.L. Division P of P.L. 114-113 extended the 25D credit for solar technologies through 2021 and modified the credit formula for these technologies. Before enactment of P.L. 114-113 , the 25D credit for all qualifying technologies was scheduled to expire at the end of 2016. The Bipartisan Budget Act of 2018 (BBA)
The Bipartisan Budget Act of 2018 (BBA; P.L. 115-123 ) extended the 25C credit retroactively for 2017. Under BBA, the credit rates for these nonsolar technologies now equal 30% for property placed in service before the end of 2019, falling to 26% in 2020 and 22% in 2021, identical to the credit rates for solar technologies.
Currently, on their 2017 federal income tax return, taxpayers may be able to claim two tax credits for residential energy efficiency. The nonbusiness energy property or "Section 25C" credit expired at the end of 2017. The residential energy efficient property or "Section 25D" credit is scheduled to expire at the end of 2021.
The nonbusiness energy property tax credit (Internal Revenue Code [IRC] §25C) provides homeowners with a tax credit for investments in certain high-efficiency heating, cooling, and water-heating appliances, as well as tax credits for energy-efficient windows and doors. For installations made during 2011 through 2017, the credit rate is 10% of eligible expenses, with a maximum credit amount of $500. The credit available for 2011 through 2017 was less than what had been available during 2009 and 2010, when taxpayers were allowed a 30% tax credit of up to $1,500 for making energy-efficiency improvements to their homes. The residential energy efficient property credit (IRC §25D), which provides a 30% tax credit for investments in properties that generate renewable energy, is scheduled to be in effect through the end of 2021, although the percentage of expenditures a taxpayer can claim will fall from 30% to 26% in 2020, and to 22% in 2021.
Advances in energy efficiency have allowed per-capita residential energy use to remain relatively constant since the 1970s, even as demand for energy-using technologies has increased. Experts believe, however, that there is unrealized potential for further residential energy efficiency. One reason investment in these technologies might not be at optimal levels is that certain market failures result in energy prices that are below the socially optimal level. If energy is relatively inexpensive, consumers will not have a strong incentive to purchase a technology that will lower their energy costs. Tax credits are one policy option to potentially encourage consumers to invest in energy-efficiency technologies.
Residential energy-efficiency tax credits were first introduced in the late 1970s, but were allowed to expire in 1985. Tax credits for residential energy efficiency were again enacted as part of the Energy Policy Act of 2005 (P.L. 109-58). These credits were expanded and extended as part of the American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5). The Section 25C credit was extended, at a reduced rate, and with a reduced cap, through 2011, as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312). At the end of 2012, the 25C credit was extended for 2012 and 2013 by the American Taxpayer Relief Act (ATRA; P.L. 112-240). The Section 25C credit was extended for 2014 by the Tax Increase Prevention Act (P.L. 113-295). The Section 25C credit was extended for 2015 and 2016 by the Protecting Americans from Tax Hikes Act (PATH Act), which was included in P.L. 114-113. The Section 25D credit as it applies to solar technologies was also extended and modified by P.L. 114-113. Most recently, the Bipartisan Budget Act of 2018 (BBA; P.L. 115-123) extended the Section 25C credit for 2017, and extended the Section 25D credit for nonsolar technologies through 2021, providing parity in Section 25D between solar and nonsolar renewable energy technologies.
Although the purpose of residential energy-efficiency tax credits is to motivate additional energy-efficiency investment, the amount of the investment resulting from these credits is unclear. Purchasers investing in energy-efficient property for other reasons—for example, concern about the environment—would have invested in such property absent tax incentives, and hence stand to receive a windfall gain from the tax benefit. Further, the fact that the incentive is delivered as a nonrefundable credit limits the provision's ability to motivate investment for low- and middle-income taxpayers with limited tax liability. The administration of residential energy-efficiency tax credits has also had compliance issues, as identified in a Treasury Department Inspector General for Tax Administration (TIGTA) report.
There are various policy options available for Congress to consider regarding incentives for residential energy efficiency. One option is to let the existing tax incentives expire as scheduled. Another option would be to repeal these tax credits. A third option would be to extend or modify the current tax incentives. Finally, policymakers could replace the current tax credits with a grant or rebate program. Grants or rebates could be made more widely available, and not be limited to taxpayers with tax liability.