Do Home Energy Credits Need A Remodel?

With the home building industry in peril, you would think that legislators would come up with immediate solutions to help foster new home construction. And there are now two well known Federal programs regarding housing: one is the $8,000 tax credit for first time home buyers, and the other is the 30% energy tax credit for a select few components of home remodeling.

The $8,000 credit for first time home buyers is a good idea, and seems to have helped at least a few buyers purchase homes. Of course, it' s not clear how many purchased bargains on previously owned homes and how many actually purchased new homes.

The 30% energy tax credits are a different matter. I’m against the current incarnation of the program for a host of reasons:

Problem No. 1: The 30% tax credit applies to only a few select items that somehow qualified, and there's no (simple) way to get on the approved list. In addition, Energy Star certification assures that the “product” has gone through some scrutiny on performance and reliability. But what of the equally important installers?

Problem No. 2: New construction gets very limited tax credits. When retrofitting existing houses, tax credits apply to the installation of efficient windows and insulation. But new construction (along with remodels) is not eligible unless it includes Geothermal, Solar Hot Water, or Solar Electricity. These benefits are meaningful only to those with enough income to make a credit of this size enticing. The middle and upper class homeowners who are willing to finance these upgrades hope that the after-tax benefits will make the investment worthwhile.

In theory, of course, the ticky-tacky downtrodden neighborhoods built after World War II can also be upgraded...to become energy efficient ticky-tacky downtrodden neighborhoods. But the energy credit will not benefit those that need it the most: those in the lower income strata that find it difficult to survive from pay check to pay check. A 30% tax credit does them no good at all. Even if the tax credit made sense for downtrodden neighborhoods, none of the older homes would ever become nearly as energy efficient as new construction.

As an example, let's say 50 homes in a low income neighborhood did take advantage of the tax credits and upgraded their windows and insulation, and added geothermal design because that was the only option approved for the benefits. This would easily add up to well over $50,000 per home – at least $2,500,000 – of which almost a million dollars is funded by you, the tax payer.

As an alternative, the 50 houses could be leveled, and excess streets abandoned to create a large developable contiguous tract of land. New home builders on the verge of bankruptcy, and even corporate national builders, could easily reinvent their business to build new urban neighborhoods using more efficient development patterns. To upgrade a new affordable home with more energy efficient windows would cost $2,000, an inch of foam insulation added to exterior walls would be another $2,000, and a high efficiency heating and cooling design just another $2,000. This highly efficient new home would use a fraction of the energy of an upgraded old home, and would add only $300,000 for all 50 homes. New neighborhoods could also have a fraction of the environmental impact of older ones, if planned using newer techniques. Low income families can live in new green neighborhoods, and the home building industry can find a new market while curbing sprawl at the same time...

Any politicians reading this? (see study).

Problem No. 3: The current tax credits promote overkill. Almost all the recent Green Certified Homes sold in the Minneapolis area had geothermal design as part of their package. Certainly a home builder increases profits by including a complex geothermal system instead of a simple, highly efficient and low cost conventional heating and cooling system. Building a new, well insulated home results in a significant reduction of heating and cooling energy needs, and the upgrade to a highly efficient system on a new home costs as little as $3,000 extra. But if the home design is not geothermal it will not get tax credits. A passive solar designed home gets free heat on sunny days — also not eligible for tax credits — but a $50,000 geothermal system is.

Problem No. 4: The current tax credits are creating a false economy for the very few businesses that manufacture approved items. Without the tax credits, these suppliers and manufacturers would need to come in at a reasonable price point/payback ratio to generate the volume of sales necessary to be profitable. In other words, they would have to invent, innovate, and deliver systems that make sense or fail in the marketplace. As soon as the tax credit ends many will not survive. An article on energy tax programs of the 1980s and the “tin men” that sold under-performing systems shows how 95% of the manufacturers of that era went out of business when the Carter era tax benefits ended. What happens to the warranty and guarantees when the company is no longer around?

So what's the solution to the problems? Either fix the tax credit program, or do away with it.

Make the program flexible enough so that new innovations can be accommodated, and make the system itself easy to access. This would encourage companies to be competitive, and give hope to start-ups that cannot right now get financing. The current application system favors well-funded, big corporations, and is far too restrictive in its scope. Have the tax credit apply to window and insulation upgrades above the "standard for code”, and include all heating and cooling systems that are above the 90% efficiency typically included in new construction. Even a tax credit limited to the price difference created by the upgrade would jump start both the green industry and new home construction.

And while we're jumpstarting...let's not forget a little history. During the dot-com crash earlier this decade, unscrupulous promoters bilked investors out of billions of dollars on false promises. These promoters did not disappear, they simply moved to the next opportunity: mortgage and real estate. Quick profits from flipping real estate created an economy that was un-policed and unsustainable. Let's not permit energy upgrades supported with a 30% tax credit to become the next unsustainable wave.

Rick Harrison is President of Rick Harrison Site Design Studio and author of Prefurbia: Reinventing The Suburbs From Disdainable To Sustainable. His website is rhsdplanning.com.