Topic Area: Energy Tax Credits

Geographic Area: Western United States

Focal Question: Was the residential energy credit provided by the federal Energy Tax Act of 1978 effective in inducing homeowners to invest in energy conservation and solar devices?


(1) Carpenter, Edwin H. and S. Theodore Chester, Jr. 1984. "Are Federal Energy Tax Credits Effective? A Western United States Survey." The Energy Journal, 5(2): 139-149.

(2) Durham, Catherine A., Bonnie G. Colby, and Molly Longstreth. "The Impact of State Tax Credits and Energy Prices on Adoption of Solar Energy Systems." Land Economics, 64(4): 347-55.

(3) Energy Tax Act (1978). U.S. 92 Stat. 3174. Public Law 95-618.


Reviewer: Andrea L. Murphy, Colby College '00


The Energy Tax Act (ETA) of 1978 (Public Law 9-618) was passed in response to the unstable energy climate of the 1970's and was intended to induce homeowners to invest in energy conservation and solar devices. The statute encouraged the conversion of boilers to coal and investment in cogeneration equipment and solar and wind technologies through the use of tax credits. The ETA provided a residential federal energy tax credit of up to $2,000 of relevant expenditures on or after April 20, 1977 and before January 1, 1986 with respect to the taxpayer's principal residence. Solar space and water heating carried a 40% tax credit, while weatherization, insulation, and similar conservation activities carried only a 15% tax credit.

Implicit in the law was that the residential energy credit could not be carried beyond December 31, 1987. However, the incentives were curtailed in the mid-80's as a result of tax reform legislation that stemmed from the philosophy of letting market conditions determine energy conservation decisions that prevailed during the Reagan administration.

How successful was this attempt to promote the market penetration of a more environmentally benign technology? A case study conducted in 1984 by Edwin Carpenter and S. Theodore Chester, Jr. attempted to answer this question using data received from 8,369 mail questionnaires returned (64% response) from random Western United States homeowners in the spring of 1981. The responses were used to determine awareness and use of the federal energy tax credit and the role of climate, dwelling type, and socio-economic factors in their use. Most importantly, the study attempted to determine what proportion of investments were made wholly or predominantly because of the Act's incentives and what proportion would have been made regardless of them.

Initial inspection of the data provided a suggestion that the federal tax credit may not have been effective in inducing homeowner energy conservation. The first question asked involved the respondents' awareness of federal tax credits and their use on tax returns for 1978, 1979, and 1980. If taxpayers had made an energy tax claim they were asked whether or not the improvements would have been made regardless of the incentives. Responses indicated that 86.8 percent of the homeowners were aware of the tax credit, while 34.5 percent of those aware made a claim between 1978 and 1980. Only 91 homeowners out of the 1440 tax credit claimants indicated they would not have added an energy-saving device without the tax credit; 94 percent stated they would have made the improvement regardless of its availability.

Upon closer inspection of the data however, specific results concerning the efficacy of the tax credit provided valuable insights for future policy. One conclusion was the size of the tax credit was important in inducing investment in energy conservation. As was previously mentioned, solar conservation was credited at a higher percent than other types of improvements. It was hypothesized that homeowners who had installed solar heating would be less likely to have done so without tax incentives. Results supported this conjecture; of those who had installed solar heating, 63 percent reported they would have made the improvements without tax credits, compared with 95 percent who had made other types of investments.

Other conclusions showed that certain groups, as indicated by geographic, environmental, housing, and socio-economic factors, were more likely to be aware of the tax credits and make use of them than others. Metropolitan residents were 1.48 times more likely to be aware of the tax credit than nonmetropolitan residents and 1.44 times more likely to have made a claim. (A metropolitan county is defined as one with a city larger than 50,000 persons.) Conventional single family homeowners were 1.59 times more likely to be aware of the tax credit and were 2.44 times more likely to have made a claim than owners of mobile homes. Although climate differentials (represented by the number of heating degree days) were not significant in tax credit awareness, as the number of heating days increased, so did the percentage of homeowners who claimed the credit.

Socio-economic variables were also important in determining tax credit awareness and use. Married homeowners were 1.48 times more likely to be aware of the credits and 1.10 times more likely to have made a claim than non-married homeowners. Homeowners with full-time employment had the highest percentage of tax credit awareness (85.4 percent on average), retired owners the second highest (83.9 percent), and owners who worked part-time the lowest (81.1 percent). Homeowners employed part-time had the highest percentage for filing a claim (35.5 percent on average), followed by full-time employed owners (32.9 percent), and retired owners last (31.0 percent). As both education and income levels rose, the percent of respondents aware of the tax credit also rose, while the percent of respondents actually filing a claim fell. Of all the aforementioned socio-economic variables, when testing for the importance of the incentives in inducing conservation investment, only marital status was found to be statistically significant. Married homeowners were 1.72 more times likely to indicate that they would have made improvements regardless of the availability of tax credits than nonmarried homeowners.

A similar study conducted in 1988 by Catherine Durham, Bonnie Colby, and Molly Longstreth supported these conclusions. Using the same sample survey data, econometric analysis was undergone to test whether state tax credits effectively encourage solar installation. The empirical results indicated that the level of the state tax credit, cost of conventional energy sources, and number of household residents are all statistically significant in the adoption of solar water heating devices. The elasticity estimate of the state tax credit coefficient implied that a 1 percent increase in the level of the tax credit would increase the probability of installing solar water heating by about .76 percent. Results also indicated that a 1 percent increase in the price of conventional energy sources result in a 1.28 percent rise in the likelihood of installing solar water heating. Lastly, as household size grows by 1 percent, the probability of installing solar water heating increases by .59 percent. These results are of particular interest because the two most statistically significant variables-level of state tax credit and the price of conventional energy sources- are both highly influenced by policy decisions.

The Energy Tax Act was passed to induce homeowner energy conservation. Although the federal government could have prompted this in several ways, the measure chosen was through tax credits. Evidence needs to be substantiated which indicates that this measure was effective, and more so than other policy options. The results of these case studies not only have implications for an efficacy analysis of the Energy Tax Act of 1978, but also provide valuable insights for current and future policy makers. The results show who the principal beneficiaries of the credit were and that its size was important in the Act’s potency. Sustainability can only occur in practice once the most effective methods for achieving objectives are established and employed. The insights provided by these studies should be used for such purposes.