You, too, can get some of the $14 billion in tax breaks in the energy bill that President Bush signed into law in August. No, you won't qualify for billions or even millions — that’s for the energy industry. But consumers concerned about energy costs and striving for efficiency could write several thousand dollars off their federal income tax.
Here's how the credits work: Buy or lease a hybrid gas-electric vehicle and qualify for a tax credit of up to $3,400. Install solar power in your home and get up to a $4,000 tax credit. Make your home more energy efficient and get credits ranging from $50 to $500.
Don't go shopping yet — purchases and home improvements don't qualify until 2006.
The consumer tax credits are unprecedented, and with oil prices setting record after record over the summer, they couldn't have come at a better time. “This is the biggest package for consumers in terms of annual incentives,” says Steve Nadel, executive director of the American Council for an Energy-Efficient Economy, a nonprofit group in Washington, D.C.
But whether the credits make sense will vary for each consumer. The vehicle credit significantly narrows, but doesn't eliminate, the price gap between hybrid and gas-only vehicles, and solar systems can cost $25,000, which means a return on investment could take years.
“Ideal candidates would be those who can afford to pay a little more now with the hope of long-term savings down the road, helped out a little by the tax savings on the initial investment,” says Mark Luscombe, a chief analyst at CCH Inc., a tax publication, software and services firm.
The credits run through 2010 for hybrid cars and SUVs, and through 2009 for medium-sized and heavy-duty hybrid trucks.
But there's a big caveat here. Since the credits are capped at 60,000 vehicles per carmaker, they could phase out fairly quickly for companies with the best-selling hybrids.
Toyota could reach the cap by the first half of 2006 given that sales of its Prius, the top hybrid in the U.S. market, have been around 10,000 a month recently. The company also sells a hybrid Highlander and a hybrid Lexus 400h SUV.
Six months after a carmaker reaches its cap, the credit is halved for that company’s vehicles, and then halved again during the following six months before ending completely.
And a second caveat: Consumers shouldn't expect freebies from the credits. The credits are meant to bring down the initial cost of a new technology, not cover it entirely, says Lowell Ungar, an analyst with the Alliance to Save Energy, a nonprofit group in Washington, D.C. "The energy savings should more than cover the rest of the cost," he adds.
With those warnings, here are some specifics on the the various credits.
Cashing in on cars
Hybrids bought in 2005 now qualify for a $2,000 federal income tax deduction, which merely reduces one's gross income. Under the new law, hybrids bought in 2006 may qualify for a tax credit, which is subtracted directly from what one owes in taxes.
That credit is the biggest consumer incentive in the law, but it’s also the most complicated because the amounts will depend on vehicle weight, fuel economy and emissions.
For example, a hybrid SUV weighing under 8,500 pounds that is 200 percent as fuel-efficient as a similar 2002 gas-only SUV would qualify for a $1,600 credit, according to CCH. It could also qualify for a “conservation credit” based on projected lifetime fuel savings — up to $1,000 for a lifetime savings of 3,000 gallons or more.
Luscombe advises shoppers not to worry about the math. “Manufacturers will most likely be happy to do the calculations for them” once 2006 comes around, he says.
If you can't wait, the American Council for an Energy-Efficient Economy has issued its credit estimates, concluding that the Toyota Prius would get the biggest credit, $3,150.
Home sweet home
Inside the home, consumers installing solar power can get two separate credits in 2006 and 2007 — each worth up to $2,000. One is for installing photovoltaic cells, which help power electricity in the home and can cost $25,000 to install. The other credit is for solar-powered hot water systems, which can cost up to $5,000.
There are two catches, however, says Noah Kaye of the Solar Energy Industries Association. “The heating system can’t be for a pool or hot tub,” Kaye says. “And the law states that the new federal credit will apply to any cost of the project that remains after state and local rebates and tax credits.”
Shopping for appliances? Certain energy efficient refrigerators qualify for a tax credit of up to $175, while dishwashers and clothes washers can get up to $100.
There are also credits for insulation, metal roofs coated with heat-reducing pigments and energy-efficient windows, doors and skylights.
Credit where credit deserved?
While energy conservation groups welcome the credits, they say consumers should have gotten even more, and over a longer period.
The Alliance to Save Energy expects $27 billion in energy savings from the incentives, a fraction of the $190 billion contained in a tax incentive package the group lobbied Congress to adopt. Those credits would have run through 2020.
The American Council for an Energy Efficient Economy agrees. Noting that most of the incentives in the new law are only available for two years, Nadel says, “This package is probably worth less than some of the tax incentives in the 1970s, which lasted for around eight years.” Those incentives were largely for industry, not consumers.
A bang for tax bucks?
So are these credits a good return for taxpayers, who foot the bill?
Carolyn Fischer, a researcher at Resources for the Future, a Washington think tank, says the tax credits should be viewed as cost-effective subsidies for new technologies — but not as a way to significantly reduce pollution or conserve energy.
“In terms of reducing current greenhouse gases or fossil fuel reliance, they are not going to be very cost-effective, since they target only a small set of users, rather than providing broad-based incentives to conserve electricity, drive less or buy more fuel-efficient cars in general,” she says. “However, they do promote the adoption of evolving technologies that do not yet have large enough markets to achieve competitive economies of scale.”
The solar industry sees it that way as well. “These tax credits will bring solar power costs over the tipping point in many areas of the country,” Rhone Resch, head of the Solar Energy Industries Association, predicted after Congress passed the bill.
'Pork buster' in favor
Even Taxpayers for Common Sense, a nonprofit watchdog that tracks spending that it considers pork, has no complaints.
In fact, the group believes the law was skewed toward giving tax breaks to the energy industry.
"The consumer-oriented tax breaks make up only a very small part of the bill,” with a worth estimated at $1.67 billion over 10 years, says spokesman Keith Ashdown. “That's only 11 percent of the total cost of the tax breaks in the bill.”
The group would have preferred a 50-50 split between consumers and industry, Ashdown says.
But overall, there’s no reason to oppose these consumer credits at a time of higher energy prices, he says: “You’d have to be a lunatic to be against them.”