The Distributional Effects of U.S. Clean Energy Tax Credits

Introduction Background Distributional Analysis Conclusion

The Distributional Effects ofU.S. Clean Energy Tax Credits

Severin Borenstein and Lucas Davis

UC Berkeley

[email protected]@berkeley.edu

September 2015

Borenstein and Davis (UC Berkeley) Clean Energy Tax Credits September 2015 1 / 33


Research Questions

Since 2006 U.S. households have received more than $18 billion in federaltax credits for weatherizing their homes, installing solar panels, buyinghybrids and electric vehicles, and other “clean energy” investments.

Who claims clean energy tax credits?

How do credit receipts vary across income groups?

Does this distributional pattern provide any broader insights aboutprogram design?



Motivation

Economists have long pointed out that subsidizing “green” is less efficientthan taxing “brown”.

Subsidies don’t get usage right.

Subsidies are a coarse instrument.

Many subsidy recipients are inframarginal.



Motivation

The distributional effects of subsidies have received less attention.

And there seems to be a presumption that subsidies are equitable.

“... many alternatives to Pigouvian taxes involve smaller ornegligible redistributions... If distributional concerns matter andcannot be adequately addressed, the welfare advantage ofPigouvian policies is far from obvious.”

– Billy Pizer, “Equity versus Efficiency in Energy Regulation” (2015)



Paper Overview

We review the clean energy income tax credits available since 2006

Technologies covered, eligibility requirements, important changes

Look for evidence of impacts using shipment and sales data

Use tax return data to see who has claimed these credits

Compare distributional impact to other tax credits and carbon tax

Perform ancillary analysis aimed at understanding non-refundability



Related Literature

Efficiency and Cost-Effectiveness of “Clean Energy” Subsidies(Hassett and Metcalf 1995; Sallee, 2011; Allcott and Greenstone 2012; Mian and Sufi2012; Boomhower and Davis 2014; Davis, Fuchs, and Gertler 2014; Fowlie, Greenstone,and Wolfram 2015; Borenstein 2015; Houde and Aldy 2015; Hughes and Podolefsky 2015)

Distributional Effects of Gasoline and Carbon Taxes(Poterba 1989; Poterba 1991, West 2004; Bento, Goulder, Jacobsen and Von Haefen2009; Burtraw, Sweeney, and Walls 2009; Hassett, Mathur, and Metcalf 2009; Rausch,Metcalf, and Reilly 2011; Williams, Gordon, Burtraw, Carbone, and Morgenstern 2015)

Distributional Effects of Clean Energy Subsidies(Dubin and Henson 1988; Crandall-Hollick and Sherlock 2014; Neveu and Sherlock,forthcoming)



Tax Expenditures By Category, 2005–2012

CategoryTotal

Expenditure,in Millions

Percentage ofTotal Credit

AverageCredit

Claimed

(1) (2) (3)

Panel A. Nonbusiness Energy Property Credit (NEPC)

Energy-Efficient Windows $4004 29.3% $415Qualified Furnaces and Boilers $2440 17.8% $411ACs, Water Heaters, etc. $2375 17.4% $512Ceiling and Wall Insulation $2020 14.8% $239Energy-Efficient Doors $1336 9.8% $170Qualified Reflective Metal Roofs $1120 8.2% $710Qualified Circulation Fans $393 2.9% $339



Annual Expenditures on U.S. Clean Energy Tax Credits, in Millions

YearWindows andOther Energy-

EfficiencyInvestments

(NEPC)

Solar Panelsand OtherResidentialRenewables(REEPC)

Hybrids andOther

Alternative FuelVehicles(AMVC)

Electric andPlug-In Hybrid

Vehicles(PEDVC)

2005 $0 $0 $0 $02006 $957 $43 $50 $02007 $938 $69 $185 $02008 $0 $217 $49 $02009 $5177 $645 $137 $1292010 $5420 $754 $93 $12011 $755 $921 $14 $762012 $449 $818 $20 $139

Total $13696 $3467 $549 $346



Residential Energy-Efficiency Investments

30% Tax Credit

Introduced in 2009

Tax Credit Decreased

to 10% in 20110

400

800

1200

1600

Uni

ts, i

n 10

00s

2005 2006 2007 2008 2009 2010 2011 2012 2013

Energy−Efficient Natural Gas Furnaces

Energy−Efficient Central Air Conditioners

Air−Source Heat Pumps

Source: U.S. Department of Energy, Energy Star Unit Shipment and Market Penetration Report, Various Years.



Residential Energy-Efficiency Investments

30% Tax Credit

Introduced in 2009

Tax Credit Decreased

to 10% in 2011

050

100

150

200

Uni

ts, i

n 10

00s

2005 2006 2007 2008 2009 2010 2011 2012 2013

Energy−Efficient Natural Gas Boilers

Energy−Efficient Heating Oil Furnaces

Source: U.S. Department of Energy, Energy Star Unit Shipment and Market Penetration Report, Various Years.



Tax Expenditures By Category, 2005–2012

CategoryTotal

Expenditure,in Millions

Percentage ofTotal Credit

AverageCredit

Claimed

(1) (2) (3)

Panel B. Residential Energy Efficiency Property Credit (REEPC)

Photovoltaic Systems $1848 53.4% $5323Geothermal Heat Pumps $1200 34.7% $3784Solar Water Heating Systems $350 10.1% $1155Wind Turbines $52 1.5% $1073Fuel Cell Systems $12 0.3% $378






(NEPC)


Hybrids andOther



Vehicles(PEDVC)

2005 $0 $0 $0 $02006 $957 $43 $50 $02007 $938 $69 $185 $02008 $0 $217 $49 $02009 $5177 $645 $137 $1292010 $5420 $754 $93 $12011 $755 $921 $14 $762012 $449 $818 $20 $139

Total $13696 $3467 $549 $346



U.S. Residential Installations of Solar Panels

Tax Credit

First Introduced

in 2006

Tax Credit

Increased

in 2009

020

040

060

080

0In

stal

latio

ns, M

W

2000 2002 2004 2006 2008 2010 2012 2014

Source: Solar Energy Industries Association, Solar Market Insight Report, Various Years.






(NEPC)


Hybrids andOther



Vehicles(PEDVC)

2005 $0 $0 $0 $02006 $957 $43 $50 $02007 $938 $69 $185 $02008 $0 $217 $49 $02009 $5177 $645 $137 $1292010 $5420 $754 $93 $12011 $755 $921 $14 $762012 $449 $818 $20 $139

Total $13696 $3467 $549 $346



U.S. Hybrid Vehicle Sales

Hybrid Tax Credit

Introduced in 2006

Tax Credit

Phased Out

for Toyota

During 2007

Hybrid Tax Credit

Ends for All

Manufacturers

010

020

030

040

0U

nits

, in

1000

s

1999 2001 2003 2005 2007 2009 2011 2013

Toyota (Prius, Camry, and Highlander)

All Other Manufacturers Combined

Source: U.S. Department of Energy, Alternative Fuels Data Center, U.S. Hybrid Electric Vehicle Sales By Model, 2015.






(NEPC)


Hybrids andOther



Vehicles(PEDVC)

2005 $0 $0 $0 $02006 $957 $43 $50 $02007 $938 $69 $185 $02008 $0 $217 $49 $02009 $5177 $645 $137 $1292010 $5420 $754 $93 $12011 $755 $921 $14 $762012 $449 $818 $20 $139

Total $13696 $3467 $549 $346



U.S. Sales of Electric and Plug-In Hybrid Vehicles

Electric Vehicle Credit

Introduced in 2010

010

2030

40U

nits

, in

1000

s

2009 2010 2011 2012 2013

Nissan Leaf

Chevrolet Volt

Tesla Model S

All Other Models Combined

Source: U.S. Department of Energy, Alternative Fuels Data Center, U.S. Plug−in Electric Vehicle Sales By Model, 2015.



Distributional Analysis

Now turn to tax return data to see who has claimed these credits.

IRS Statistics of Income, Publication 1304, Table 3.3

Public Use Microdata Accessed through Dan Feenberg at NBER

Some inherent limitations of working with tax return data

Excludes households that do not file tax returns

Annual income may be a poor proxy for lifetime income

Do not allow us to address the question of subsidy incidence



Average Credit Per Return, by Adjusted Gross Income

A: Residential Energy Credits, 2006-20120

20

40

60

80

do

llar

s

<10 10-20 20-40 40-75 75-200 >200

Nominal AGI, thousands of dollars




B: Alternative Motor Vehicle Credit, 2007-20120

.51

1.5

22.5

do

llar

s

<10 10-20 20-40 40-75 75-200 >200





C: Qualified Plug-in Electric Drive Motor Vehicle Credit, 2009-20120

24

68

do

llar

s

<10 10-20 20-40 40-75 75-200 >200




Extensive Versus Intensive Margin

A: RECs, Share Claiming Credit 2006-2012, by Adjusted Gross Income0

.02

.04

.06

frac

tio

n

<10 10-20 20-40 40-75 75-200 >200




Extensive Versus Intensive Margin

B: RECs, Average Credit Amount Claimed 2006-2012, by Adjusted Gross Income0

500

1000

1500

do

llar

s

<10 10-20 20-40 40-75 75-200 >200




Concentration Curves

A: Residential Energy Credits, 2006-2012

AGI

credit

45 degree line

0.2

.4.6

.81

Cum

ula

tive

frac

tio

n o

f cr

edit

s an

d A

GI

0 .2 .4 .6 .8 1Cumulative fraction of taxpayers, ranked by AGI




B: Alternative Motor Vehicle Credit, 2007-20120

.2.4

.6.8

1C

um

ula

tive

frac

tio

n o

f cr

edit

s an

d A

GI





C: Qualified Plug-in Electric Drive Motor Vehicle Credit, 2009-20120

.2.4

.6.8

1C

um

ula

tive

frac

tio

n o

f cr

edit

s an

d A

GI




Are They More Regressive Than Other Tax Expenditures?



Are They More Regressive Than Other Credits?

Concentration Coefficients for Selected Tax Credits

Panel A. Clean Energy Tax Credits

Residential Energy Credits 0.606Alternative Motor Vehicle Credit 0.584Plug-in Electric Drive Vehicle Credit 0.801

Panel B. Other Major Tax Credits

Earned Income Tax Credit –0.415Making Work Pay Credit 0.163Child Tax Credit 0.185First-time Home Buyer Credit 0.222Foreign Tax Credit 0.904



Does Non-Refundability Matter?

05

1015

20A

vera

ge r

esid

entia

l ene

rgy

cred

it am

ount

0 20000 40000 60000 80000 100000Tax liability before Residential Energy Credit



Why are these credits non-refundable?

Upon reflection, the whole idea of a non-refundable credit is odd.

“It is extremely unlikely that externalities and elasticities changein an abrupt and discontinuous fashion exactly at the point ofzero income tax liability... Yet such discontinuities are inherent inthe application of all basic forms for tax incentives...”

– Batchelder, Goldberg, and Orszag, “Efficiency and Tax Incentives: The Case forRefundable Tax Credits” Stanford Law Review (2006)



How About Compared to a Carbon Tax?

Source: Williams, Gordon, Burtraw, Carbone, Morgenstern, National Tax Journal, 2015.



Conclusion

Clean energy tax credits go predominantly to higher-income Americans.

Bottom three quintiles have received 10%, while top quintile has received 60%.

The most extreme are the tax credits aimed at electric vehicles, top quintile 90%.

Driven by both participation rates and size of credit claimed by recipients.

More regressive than most other tax credits and carbon tax.

We are also struck by the horizontal inequity of these programs.

40+ million U.S. households ineligible because they don’t have tax liability.

Our results suggest these households would claim credits were they eligible.

Moreover, renters/landlords ineligible, missing large part of market.


The Distributional Effects of U.S. Clean Energy Tax Credits

Government & Nonprofit

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