Window Closing On Home Energy Efficiency Tax Credit

By Robbie Harris, Sierra Club Green Home
You may have gotten the mailers or seen some items in stores marked “Eligible for the Energy Efficiency Tax Credit!” Maybe you bought that new storm door, window, or even the entire energy-efficient heating and cooling system qualified for the credit. Then, if you noted it on your federal income tax return, you got some money back—the government’s way of thanking you for doing the right thing for your home and the planet.

 “The goal overall was to encourage people to make that extra jump to the energy efficient product,” said Thomas Simchak, a senior research associate at the Alliance to Save Energy in Washington, D.C. “If they were going to be installing an air conditioner, [the tax credit was intended to] have a value that would compensate for the price difference for the energy efficient unit.”
Blink and You May Miss It
The federal tax credit for existing homes has been available to homeowners for their primary dwelling—albeit in changing amounts—for most of the last six years. You still have time to get in on the tax incentives, but there are costs to putting off those household improvements. These federal incentives will be gone entirely by the end of 2011. Qualified items must be installed and placed into service before the end of the year to get you money back on your federal tax return.

Even if you upgraded to energy-efficient products, you may be among the many Americans who left money on the table. A survey out this week finds “[m]ost American consumers aren’t at all aware of the tax advantages of upgrading to energy efficient products.” Karl Zellmer, vice president of air conditioning sales at Emerson Climate Technologies, guided a Harris Poll commissioned by the manufacturing company. The poll found that “71 percent of consumers did not take advantage of any rebates, tax holidays, or other incentives” and that 61 percent did not even know these potential money savers existed.
“The survey did show that a majority of folks have gone to [compact] fluorescent bulbs to reduce energy consumption, and that does help,” Zellmer says. “They may do that because of the four or five dollars extra for the cost of the light bulb and they get beat up with that information everywhere they go.”
But when it comes to the details about state, local, and federal incentives, Zellmer says the study clearly shows that consumers are not getting the information they would need to calculate the costs and the paybacks of more-substantial purchases.
Like the weather, the federal government’s home energy efficiency tax incentives have been, well, changeable. The tax credit came in as part of the Energy Policy Act of 2005 signed by President George W. Bush and began as a 10-percent credit on certain items. It disappeared for a year in 2008. After returning in 2009, it reached its highest level—30 percent—under the Economic Recovery act, signed by President Barack Obama in February 2010. Then, almost before you could grab the low-hanging fruit of the tax credit tree, it was cut back to 10 percent for 2011. This most recent change also came with lower thresholds for rebates and more restrictions; there is now a $500 cap on tax credits a homeowner can use. Blogger Darwin Prince says the smaller tax credit and lower threshold for cash back made the tax credits less attractive to consumers—and less effective overall.
“When the window tax credit was up to $1,500, for instance, that was a substantial tax credit, which rightfully incentivized many homeowners to get around to installing new windows, making their homes more efficient and pumping probably $5,000 to $15,000 into the economy, depending on the extent of their upgrade,” says Prince on his blog Darwin’s Money. “The dual benefit was lower energy consumption into the future while providing manufacturers and installers with much needed revenues.”
At The Door Store, in Glenview, Illinois, where some doors’ prices run into the thousands, the 30-percent tax credit was extremely attractive to buyers. Owner Chris Erickson said, as that year drew to an end, “People were actually offering to pay extra as an incentive to get their door installed before the deadline.” The store did not accept the extra money, however, and could not accommodate all requests.
There is no way to know exactly how many homeowners took advantage of the federal tax credit in its various incarnations. The U.S. Internal Revenue Service does not publish that information. A report by the Government Accounting Office is expected to be published in the near future.
“Anecdotally, talking to contractors and vendors, the home improvement stores and window installers definitely saw this as a big selling point,” says Simchak, senior research associate at the Alliance to Save Energy.
If some merchants say the tax credit helped sales, and consumers who might have taken advantage of the tax credit say they were unaware of them, why not continue or even increase the tax incentives for home energy efficiency? Simchak, who is an energy efficiency advocate, believes the issue got buried.
“I think it’s largely a victim of congressional deadlocks more broadly,” Simchak says. “There is not a lot moving in Congress right now and other items were seen as ‘must pass,’ while the energy tax credits were not.”  He adds that, even though they are going away soon, this “may not be the last we’ve heard of these tax credits. [But] we’re not optimistic they’ll be extended before the end of the year.”
Similar tax credits for commercial buildings, however, will remain in effect until 2014.
A Window Closes, a Door Opens
Even if these particular federal tax incentives for home energy efficiency do not come back any time soon, other options remain for capitalizing on your energy efficiency purchases. Similar state initiatives are unaffected by the closing of the federal window at the end of this year. You can check your state’s programs at http://dsireusa.org/.
Emerson Climate Technologies has just unveiled a new smart phone app that allows you to compute the true costs of products by energy use calculated using rates in your area. Zellmer says the new smart phone application will help consumers research purchasing options ahead of time, instead of waiting until the air conditioner stops working on a 90-plus-degree day and running out to buy anything to cool off. His survey found that consumers are aware that heating and cooling are their highest energy costs, but the majority were not willing to spend more for energy efficiency upgrades unless the payback time was relatively short. According to the poll, 67 percent of respondents said they would be willing to invest up to $5,000 in a home energy upgrade, but only if it paid for itself within six months. Only 29 percent of those surveyed said they would be willing to invest that amount if the payback were 10 years.
Now that the sun is setting on this particular tax credit, there will be an opportunity to assess its effects.  After all, if a tax incentive is successful, it should go away once the behavior it aims to encourage is widely adopted. Simchak suggests that if a large number of homeowners believe upgrading their homes for energy efficiency is the right thing to do, they will do so, cash back or not.
“These tax credits got a lot of people thinking about energy efficiency, even if they didn’t actually go out there and use the credit,” Simchak. “People started hearing about energy efficiency on the news, and the media picked this up as a way to get yourselves $500 or $1,000. People say, ‘Oh, energy efficiency, yeah, I guess my kitchen door is pretty drafty, and I feel that chill on my feet in the morning, and yes, that does affect my bills, and they have been going up,’ so it gets people thinking that this is important to them.”