According to a report issued by the American Council for an Energy-Efficient Economy, tax reform will provide Congress with many opportunities to promote energy efficiency and remove barriers through the tax code. Provisions to encourage advanced energy-saving technologies would increase employment by an average of 164,000 jobs over the 2014-2030 period. The report, “Tax Reforms to Advance Energy Efficiency,” looks at tax reforms that could be made in six major areas:
1. Refine depreciation periods to more accurately reflect the average service lives of equipment. Under current law, the report notes, depreciation periods do not provide accurate representations of typical service lives in the field - especially when it comes to heating and cooling equipment. This equipment currently is depreciated over 39 years when the average life span is 15 to 25 years.
“The 39-year depreciation period acts as a barrier to energy efficiency as many businesses will choose to repair equipment when it fails so as to avoid having to write off the un-depreciated value,” the report says. “Since equipment has been steadily increasing in efficiency, encouraging equipment replacement will save energy and also create sales and jobs for equipment manufacturers.”
2. Refine existing energy-efficiency tax incentives. A market transformation approach should be used, the report states, to promote energy-saving technologies and practices that have little market share today.
“Temporary federal incentives can advance these technologies and practices to a point where they can prosper without incentives,” the report says. “Tax incentives first enacted in 2005 illustrate how a focus on advanced technologies [high-efficiency appliances and heating/cooling equipment] can help to transform markets.”
3. Promote capital investment in manufacturing. Much of the equipment and production processes in American factories are old and inefficient, the report notes, especially when compared to modern equipment and processes used by international competitors. Modernizing U.S. factories would give them a competitive edge.
“As we emerge from the Great Recession, many industrial firms have capital to invest, but a nudge from the tax code could spur additional investments here in the U.S.,” the report says.
4. Add a price on emissions. America’s present tax system primarily taxes things that are from productive economic activity, the report says, such as wages, nonwage income and corporate taxes. An alternative is to tax cigarettes, alcohol - and pollution. These are known as Pigovian taxes.
“We are not suggesting that all revenues be collected from Pigovian taxes, but instead an increased portion of the current tax burden comes from these taxes,” the report explains. “Many prominent economists and politicians have spoken in favor of Pigovian taxes to regulate pollution.”
5. Consider ways to remove disincentives to energy efficiency investment from the business tax code. Unlike individual income taxes, businesses are taxed on their profits and most expenses are deductible, including energy costs, which creates several disincentives to energy-efficiency investments, the report notes.
First, the federal government is effectively subsidizing 25% to 35% of a business’s energy costs, which enables higher energy consumption.
“Second, when businesses do invest in energy efficiency, a portion of the energy savings goes to the federal government in the form of higher taxes,” the report explains. “When the full value of the savings does not accrue to the firm, the incentive to make investments go down.”
6. Eliminate or reduce subsidies that target the fossil fuel industry. While ACEEE did not study these subsidies at length, there is evidence from other studies to suggest that the special treatment the fossil fuel industry receives from the federal government costs it $12 billion to $13 billion each year.
“We have not researched this issue in depth, but no discussion of tax reform is complete without at least mentioning that subsidies for traditional energy sources ‘tilt the playing field’ toward increased use of traditional fuels, at the expense of energy efficiency,” the report says.
To download a free copy of the full report, visit aceee.org/research-report/e132.