Not All Tax Credits Are Bad

Not All Tax Credits Are Bad

With reference to your June 2000 (EBN Vol. 9, No. 6) editorial entitled “Perspective: Green Building Tax Credits? No, Thanks!” you are entirely correct—the last time the federal government offered tax credits for solar energy applications, they made a monumental mistake, one that almost destroyed the solar industry.

The heart of their mistake was that the tax credit was price-based. As you point out in your editorial, “it doesn’t take a rocket scientist to come up with the idea of jacking up the price” to maximize the profit per system. And as you have also pointed out, price-based tax credits are highly counterproductive to a thriving renewable energy marketplace for at least two reasons: 1) they inherently discourage price competition in the marketplace, and 2) they inherently encourage fraud and abuse. The first outcome reduces the number of systems that actually get manufactured and sold, because profit margins per sale become much more important than sales volume, and the second outcome tends to force legitimate business people out of the market. Ultimately, when the tax credit ceases, most renewable energy business activity also ceases.

However, there is an alternative form of tax credit—the performance-based tax credit—that is market friendly, both in the short term and the long term. As you did in your editorial, let me provide an example: Say there is a tax credit for solar water heating systems that provides $0.35 per annual kWh of certified electricity savings. If I offer a solar water heating system that is certified to save 2000 kWh per year at a price of $3,000 (in line with present market pricing), then this tax credit will cover 23% of its cost. On the other hand, if I am able to get the price of that system down to $700, then the tax credit will pay 100% of its cost. Thus, the lower I am able to drive my costs and the price of my systems, the greater the percentage of that price that will be covered by the tax credit. This sets up a market dynamic that has almost the opposite effect of a price-based tax credit. First, price competition is highly encouraged, resulting in the natural tendency on the part of businesses to increase efficiency, reduce costs, and maximize sales volume. Second, with performance certified through national standards and price competition maximized, there is simply no room left in the marketplace for fraud and the con artist.

With these very different market forces in effect, the result is also very different. Renewable energy industries work hard to gain volume production, distribution, marketing, and sales capabilities; the performance-to-price ratio (kWh/year per unit price of products) is increased; and the resulting products gain significant consumer recognition, confidence, and loyalty. The net result is that renewable energy products become much more competitive in the marketplace than their conventional counterparts, even after tax credits sunset.

Such a tax credit proposal has been introduced in the U.S. Senate by Senator Robert C. Smith (R-NH). Entitled the “Energy Efficient Buildings Incentives Act” (S. 2718), this Bill provides incentives not only for solar energy systems, but also, and perhaps more important, for energy-efficient building design and construction technology. I encourage you to closely examine the Smith Bill.

Philip Fairey, Deputy Director

Florida Solar Energy Center

Cocoa, Florida

Editor’s reply:

Thanks for the informative letter. We agree wholeheartedly that a performance-based tax credit approach is vastly superior to the price-based tax credit that we suffered through in the 1970s and ’80s. See page 5 for details on the Smith Bill.

— AW