60% of $18B in US clean energy tax credits 2006-2012 went to top 20% by income; 90% in the plug-in program
A working paper by a team at the Energy Institute at Haas, University of California, Berkeley, has found that 60% of the $18 billion in US federal income clean energy tax credits issued between 2006 and 2012—e.g., for weatherizing homes, installing solar panels, and buying hybrid and electric vehicles—went to the top income quintile in the US (above $200,000 per year). The bottom three quintiles (up to $75,000 per year) received about 10%.
The most extreme case, Severin Borenstein and Lucas Davis found through their examination of tax return data from the IRS, is the program aimed at electric vehicles—the top income quintile received about 90% of all these credits. As a result of the work, Borenstein and Davis conclude that tax credits are likely to be much less attractive on distributional grounds than market mechanisms to reduce GHGs.
|Electric Vehicle Credit. Average credit per tax return, by income level. Source: Borenstein and Davis. Click to enlarge.|
It can often be easier politically to introduce subsidies than taxes, but the two are not equivalent. Probably the single biggest limitation of technology-based subsidies is that they don’t achieve the efficient level of usage, but economists have pointed out other limitations as well. For example, Holland et al. (2015) shows that the external benefits from electric cars vary widely (and can even be negative) depending on how electricity is generated.
A growing literature examines the efficiency and overall cost-effectiveness of clean energy technology subsidies, but the distributional effects have received much less attention. In this paper we use tax return data to examine the socioeconomic characteristics of taxpayers who receive US federal income tax credits. We focus on four major tax credits for individuals aimed at encouraging households to weatherize their homes, install solar panels, and to buy hybrid and electric vehicles. Since 2006, tax expenditures for these “clean energy” tax credits have exceeded $18 billion.
We find that these tax expenditures have gone predominantly to higher-income Americans.—Borenstein and Davis (2015)
Between 2006 and 2012, total clean energy tax credit expenditures were $18.1 billion.
The largest of the tax credits is the Nonbusiness Energy Property Credit (NEPC) for homeowners who weatherize their homes or make other types of residential energy-efficiency improvements. This accounted for $13.7 billion in total tax expenditures over the period studies (75.7%).
The second largest clean energy tax credit is the Residential Energy Efficient Property Credit (REEPC), with a total of $3.5 billion (19.3%).
The Alternative Motor Vehicle Credit (AMVC) is for purchases of qualified hybrids, as well as natural gas, hydrogen, fuel cell, and other alternative fuel vehicles. The total for this credit was $549 million. The Qualified Plug-in Electric Drive Motor Vehicle Credit (PEDVC) is a credit for electric vehicles and plug-in hybrid vehicles purchased beginning in 2009, with a total of $346 million for the period. New energy vehicle-related tax credits thus totalled $895 million, or 5% of the total.
The authors observed that the size of the AMVC varied substantially across years, decreasing in 2008 after Toyota vehicles became ineligible and then increasing again in 2009 as more eligible hybrids become available. Hybrid vehicles are no longer AMVC-eligible after 2010, and the program became smaller. The plug-in credit increased significantly between 2010 and 2012 Although IRS data are not yet available for 2013 and 2014, the authors expect that expenditures on the PEDVC have increased in parallel with the ongoing increase in electric vehicle sales.
The PEDVC is much more concentrated than the other categories of credits. The bottom 80% of filers receive a little more than 10% of all credits, and the bottom 90% of filers receive only about 40% of all credits. It may simply be that electric vehicles, for the moment, are only affordable for relatively rich households. Even after the credit, electric and plug-in electric drive vehicles are expensive compared to equivalently-sized gasoline-powered vehicles. Another possible explanation is that in “green” communities (which tend to be high income), driving an electric vehicle could be perceived as a symbol of status. Kahn (2007) makes this argument about hybrids, but over the last several years this probably applies better to electric vehicles.—Borenstein and Davis
Whereas tax credits are received disproportionately by high-income households, a carbon tax would be paid disproportionately by high-income households, the authors note—about four times as much as the bottom quintile.
It would seem difficult, therefore, to prefer tax credits over a carbon tax on distributional grounds. There may well be political considerations that continue to favor tax credits, but this approach comes at real cost, both in terms of efficiency and equity.—Borenstein and Davis
Severin Borenstein and Lucas Davis (2015) “The Distributional Effects of US Clean Energy Tax Credits”