Topic:
TAX CREDITS; ENERGY ASSISTANCE; SALES TAX; TAX EXEMPTIONS; ENERGY CONSERVATION; RETAIL TRADE;
Location:
ENERGY ASSISTANCE; ENERGY CONSERVATION;

OLR Research Report


July 7, 2006

 

2006-R-0431

STATE AND FEDERAL TAX INCENTIVES

FOR ENERGY EFFICIENT EQUIPMENT

By: Kevin E. McCarthy, Principal Analyst

You asked for a description of state and federal tax incentives for energy efficient equipment.

SUMMARY

A variety of efficiency products, including insulation, programmable thermostats, and energy efficient windows, furnaces, and boilers, are exempt from state sales tax until June 30, 2007. There are also federal income tax credits for taxpayers who install certain energy efficiency improvements in 2006 or 2007. The state and federal incentives overlap to a large extent, and a consumer is eligible for the state sales tax exemption and the federal tax credit for measures that meet the eligibility criteria of both laws. Federal law also provides tax credits for builders of energy efficient homes and tax deductions for corporations that make energy efficiency improvements to commercial buildings.

STATE INCENTIVES

The following products are exempt from the sales tax until June 30, 2007: (1) insulation, programmable thermostats, water heaters and water heater blankets, window film, window and door weather strips, and caulking; (2) natural gas and propane furnaces and boilers that meet federal Energy Star standards; (3) windows and doors that meet federal Energy Star standards; (4) oil furnaces and boilers that are at least 85% efficient; and (5) ground-based heat pumps that meet the minimum federal efficiency rating. Further information about the Energy Star standards, including a list of products that meet them, can be found at www.energystar.gov.

FEDERAL INCENTIVES

The Energy Policy Act of 2005 provides federal income tax credits for homeowners who make energy improvements from January 1, 2006 through December 31, 2007. The eligible measures include:

1. added insulation to walls, ceilings, or other part of the building envelope;

2. energy-efficient replacement windows;

3. high-efficiency gas, oil, and propane furnaces and boilers;

4. high-efficiency central air conditioning units, including air-source and ground-source heat pumps;

5. high-efficiency fans for heating and cooling systems; and

6. high-efficiency water heaters, including heat pump water heaters.

The credits are (1) 10% of the cost of added insulation, up to $500; (2) 10% of the cost of replacement windows, up to $200; (3) $150 for qualifying furnaces and boilers; (4) $300 for qualifying air conditioning units; (5) $50 for qualifying heating fans and cooling systems; and (6) $300 for qualifying water heaters. The maximum amount of homeowner credit for all improvements combined is $500 during the two-year period of the tax credit.

The act also provides tax credits for builders of energy efficient homes. Builders are eligible for a $2,000 tax credit for a new energy efficient home that achieves 50% energy savings for heating and cooling over the 2004 International Energy Conservation Code and supplements. At least 20% of the energy savings must come from building envelope improvements (e.g., window replacements). There is a similar provision for energy efficient manufactured homes manufacturers. The tax credits apply to qualified new homes built or produced from January 1, 2006 through December 31, 2007. Further information about the tax credits is available at http: //www. energystar. gov/index. cfm?c=products. pr_tax_credits#2.

In addition to the tax credits, the Energy Policy Act provides tax deductions for corporations that make energy efficiency improvements to commercial buildings. The deduction is $1.80 per square foot for owners of new or existing buildings who install measures that reduce the building's total energy and power costs by 50% or more in comparison to a building meeting minimum requirements set by ASHRAE Standard 90.1-2001. These measures can include (1) interior lighting; (2) building envelope; or (3) heating, cooling, ventilation, or hot water systems. Deductions of $0.60 per square foot are available to owners of buildings in which individual lighting, building envelope, or heating and cooling systems meet target levels that would reasonably contribute to an overall building savings of 50% if additional systems were installed. Further information about these incentives is available at http://www.dsireusa.org/library/includes/incentive2.cfm?Incentive_Code=US40F&State=Federal&currentpageid=1&ee=1&re=1.

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