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What’s next for expiring energy incentives?

Big tax credits for geothermal and energy-efficient construction expired at the end of 2016. How will builders respond?

By Jeffrey Lee

Staff Writer

The end of 2016 brought a wave of change for the home construction industry — and not just because of the election of Donald Trump.

Several notable energy tax incentives were allowed to expire after they had been repeatedly extended in previous years:

  • Section 25D, which provided 30 percent tax credits for geothermal, wind, and fuel cell systems.
  • Section 45L, a $2,000 tax credit for builders of energy-efficient homes.
  • Section 25C, a $500 tax credit for energy-efficient improvements.
  • Section 179D, a tax deduction for commercial or multifamily building owners who made their buildings more efficient.

In the past, these provisions were frequently bundled and renewed with bigger tax issues such as Medicare reimbursement, the alternative minimum tax, or the research and development tax credit, says J.P. Delmore, federal legislative director for the National Association of Home Builders (NAHB).

"The big difference at the end of 2016 as compared to all the previous years is that there was no must-pass tax item," he says. The PATH Act in 2015 made several of the major tax fixes permanent, but it extended many of the energy credits for only two years. In 2016, with all of the major issues taken care of, the House of Representatives had little interest in renewing the efficiency provisions, Delmore says. "And with Trump taking office, they were in a position to toe the hard line and say ‘No.'"

Impact of the Expirations

The section 25D renewable energy tax credits were being followed particularly closely by the NAHB and construction pros. The PATH Act extended the 30 percent tax credit for solar technologies until 2021, but the other technologies — small wind, fuel cells, and geothermal — were left out. A bipartisan deal to restore the credits for those technologies was never completed.

That means some contractors and their customers are thinking twice before making large investments in geothermal.

"I would say if there's no extension to the tax credit, that geothermal sales are going to be reduced dramatically," says Justin Isaacson, an HVAC contractor and owner of Ike's Heating and Cooling in Nevis, Minnesota.

"I would say if there's no extension to the tax credit, that geothermal sales are going to be reduced dramatically."

Without the tax credit, he says, the payback period will be too high for many customers. That may not affect the decision for a customer who plans to stay in their house for a long time. "But if somebody's building a house, and they don't know if they're going to stay there forever, or they're just doing the heating upgrade, they're definitely not going with geothermal," Isaacson says. "They're going to be a candidate for a high-efficiency gas furnace. I'm thinking that propane gas furnace sales and possibly matching it up with an air-source heat pump, those types of systems are going to be prevalent."

And while the federal tax incentives have expired, builders may still be eligible for rebates from their local utility or propane provider. The Propane Energy Pod Builder Incentive Program, for instance, provides up to $1,500 per home for builders constructing new homes with propane space heating, water heating, and other technologies.

Outlook for 2017

Although a congressional focus on tax reform could provide an opportunity to revisit the energy incentives, Delmore is pessimistic about seeing any of the provisions extended in the current political environment.

"In the short term, by which I mean the next two years at a minimum, I don't really see a viable path to revisiting those tax extenders that weren't extended after last year," he says. "The next reset opportunity politically would be after the midterm elections if there was some type of political shift there."

Meanwhile, the expiration of the efficiency credits is also likely to influence the construction market, Delmore says. The $2,000 tax credit for builders of energy-efficient homes had been a major driver for builders to market green technologies more aggressively to their buyers, so builders may now focus less on green in their marketing. Remodelers, too, may focus less on educating their customers about energy-efficient products without the benefit of the $500 tax credit to present them.

On the other hand, consumers have already become much more aware of the availability of energy-efficient options for their home, Delmore says. "The visibility of green as a whole is so much higher now," he says. "I hope folks continue to talk about different options that buyers have and give them an idea of the financial savings from doing some of them."


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