Key Elements of the U.S. Tax System

The federal government provides roughly $10 billion per year in tax subsidies that encourage non-fossil fuels (figure 1).  The two largest are the energy investment tax credit (ITC) and the renewable electricity production tax credit (PTC), followed by incentives for electric vehicles and residential energy.

Electricity Production

The ITC (also known as the Section 48 credit) provides a one-time credit—currently, 10 percent—for new investment in qualifying facilities. Solar generators are its main recipients, with small amounts going to fuel cells, combined heat and power systems, and other projects. The PTC (also known as the Section 45 credit) provides a per kilowatt hour subsidy—current, 1.5 cents—to qualifying facilities during their first 10 years of operation. Wind-powered generators are the main recipients, but some geothermal, biomass, solid waste, and hydro facilities also claim it.

Two very small tax subsidies also target nuclear energy. Existing nuclear facilities get a special deduction for some contributions to future decommissioning funds. A production tax credit for advanced nuclear power facilities is little used to date.

Electric Vehicles

The tax code provides a substantial tax credit to individuals and businesses who purchase or lease plug-in electric light passenger vehicles and trucks. The credit starts at $2,500 and increases to $7,500 based on battery capacity. Plug-in hybrids typically qualify for credits of $4,000 to $6,000, while all-electric vehicles get the full $7,500. The credit phases out over the course of a year once a manufacturer reaches 200,000 qualifying vehicles. Tesla and General Motors reached that limit in 2018 and 2019, respectively. A smaller tax credit is available for electric motorcycles and other two-wheeled vehicles. There are also two small tax credits for fuel cell vehicles and alternative vehicle refueling.

Residential

The tax code also encourages homeowners to improve energy efficiency and switch to alternative sources. The largest of these benefits is residential energy-efficient property tax credit, known as Section 25D, which supports home installation of solar electric and water heating systems. The residential energy efficiency credit provides up to $500 for energy efficiency improvements in existing homes, including insulation improvements and high-efficiency heating, cooling, and water heating. Also, energy conservation subsidies provided by public utilities are excluded from taxable income.   

OTHER

Manufacturing facilities can claim a tax credit for investment in advanced energy property that generates clean power and/or improves efficiency. Commercial buildings get a special deduction of up to $1.80 per square foot for investments in lighting, heating, cooling, water heating, and building envelopes that substantially improve energy efficiency.

The federal government provides a financing subsidy for certain bonds issued to invest in renewable energy and energy conservation projects.  

Expiring Provisions

Most of these incentives are part of a larger phenomenon of expiring tax provisions, which sunset every few years but are frequently extended; they are therefore referred to collectively as the “tax extenders”. Some, such as the second-generation biofuel tax credit, have been allowed to expire. Others, such as the credit for residential solar, are slated to expire in the near future. 

Updated May 2020