Who Claimed Energy Tax Credit?

Originally published by: NAHBSeptember 6, 2011

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2009, the rules for the tax code section 25C $1,500 energy-efficient improvement tax credit and the uncapped 25D 30% tax credit for home power production equipment tax credit were significantly expanded. The 25C credit is used to improve existing primary residences by installing energy-efficient windows, doors, roofing, and some home property like water heaters. The 25D credit, which rewards homeowners for installing solar panels, geothermal heat pumps, small wind turbines and fuel cells, can be used in existing homes and new construction.

The result of the 2009 policy change was a significant increase in the use of these tax credits, which led to remodeling activity and job creation. And we now have 2009 IRS data that allows tracking where the credit was claimed. The results indicate that while the largest states, in terms of homes and population, witnessed the largest tax credit claims, there was also geographic clustering of credit claims on a per taxpayer basis.

The map above tracks the number of taxpayers in each state that claimed either or both the 25C and 25D tax credit, although NAHB estimates that most of the claims were 25C related. Intuitively, larger states in terms of population had larger numbers of taxpayers claiming the credit.

In the next map, a slightly different picture emerges. This map presents the percentage of taxpayers in each state who claimed either or both the 25C and 25D tax credits in 2009. A clear concentration of tax credit use can be seen for states in the northeast and upper midwest. Why?  There are two leading explanations. First, homeowners in states in cold weather climates have more to gain from energy-efficient improvements in terms of reduced utility bills. However, there is no reason to believe that warm weather homes could not also benefit from energy-efficient improvements.

Thus, the second explanation, and the stronger one in my opinion, is that the states with relatively more common use of the energy tax credits also contain older homes. The following map details the median year of construction for housing units in each state, and there is indeed a rough correlation between tax credit use and older housing with concentrations of both in many northern states.

A homeowner with a 50 year-old home is much more likely to improve their residence than a homeowner who has purchased a newly constructed home, with new construction more common in the southern part of the nation.

The last map tracks the total amount of the tax credits claimed.  Overall, in 2009 taxpayers claimed nearly $5.9 billion in 25C and 25D tax credits, with a breakout between the two credits not yet been provided by the IRS. In general, NAHB estimates that there were many more taxpayers claiming the 25C credit, but the average amount of the 25C credit was significantly smaller than the uncapped 25D tax credit. For the two tax credits combined, fully 93% of tax credit claims were made by taxpayers who have an adjusted gross income of no more than $200,000, which is indicative of a middle class tax program.

The net economic impacts of these tax credit programs are also clear.  The following chart plots new home sales (right axis) and total remodeling expenditures (left axis). The data indicate that remodeling expenditures fared better over the 2008 through 2010 period than new home sales.In fact, it is quite reasonable to believe that the “bump” remodeling activity seen at end of 2009 and the beginning of 2010 was directly due to the improved 25C and 25D rules.

While the 25C credit, along with the 25D credit, were helpful in creating and sustaining jobs in 2009 and 2010 in the residential and home building sector (every $100,000 in remodeling activity creates about one full-time job), the tax credit was significantly weakened for 2011. For more information on the current tax credit rules, please see the NAHB factsheet on both the 25C and 25D programs

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