ENERGY 

CONSERVATION AND 

CLIMATE CHANGE

Factors to Consider in 

the Design of the 

Nonbusiness Energy 

Property Credit

Report to Congressional Requesters

April 2012

GAO-12-318

United States Government Accountability Office

GAO
Page i GAO-12-318 Nonbusiness Energy Property Tax Credit

Letter 1 

Scope and Methodology 2

Summary 3

Agency Comments 4

Appendix I Briefing Slides 5

Appendix II Use of the Credit by Spending Categories and Limits 32

Abbreviations

AGI adjusted gross income

CO2 carbon dioxide

DOE Department of Energy

IRC Internal Revenue Code

IRS Internal Revenue Service

SOI Statistics of Income Database

Contents

This is a work of the U.S. government and is not subject to copyright protection in the 

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without further permission from GAO. However, because this work may contain 

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Page 1 GAO-12-318 Nonbusiness Energy Property Tax Credit

United States Government Accountability Office

Washington, DC 20548

April 2, 2012

The Honorable Max Baucus

Chairman

Committee on Finance

United States Senate

The Honorable Jeff Bingaman

United States Senate

The Honorable Dianne Feinstein

United States Senate

The Honorable John F. Kerry

United States Senate

The Honorable Olympia J. Snowe

United States Senate

The nonbusiness energy property credit1

In the enclosed slides, this report compiles and expands upon information 

previously presented to you in response to your request, which asked us 

to examine factors relating to the nonbusiness energy property credit. To 

address the request, we (1) evaluated factors to consider in deciding 

whether the credit should be cost-based or performance-based; and (2) 

estimated how requiring that only spending above a minimum amount be 

is one of a number of federal 

initiatives that seek to address concerns about U.S. reliance on foreign 

energy sources and the impact of carbon dioxide (CO2) emissions on the 

climate. Enacted as part of the Energy Policy Act of 2005, the 

nonbusiness energy property credit was intended to increase 

homeowners’ investment in energy conserving improvements by reducing 

their after-tax costs. The credit is calculated as a percentage of qualified 

spending on such improvements as insulation systems, exterior windows 

and metal roofs up to a maximum claimable credit. The maximum credit 

was set at $500 in 2006 and 2007, raised to $1,500 in 2009 and 2010, 

and lowered back to $500 in 2011.

 

1 I.R.C. § 25C.

 
 

Page 2 GAO-12-318 Nonbusiness Energy Property Tax Credit

eligible for the credit, or introducing a base amount for the 2009 credit 

may have affected measures such as the amount of credit claimed, the 

revenue cost to the federal government, and incentives for taxpayers to 

increase their spending on energy efficiency improvements.

For our first objective—to evaluate factors to consider in deciding whether 

the credit should be cost-based or performance-based—we reviewed 

relevant literature and consulted with experts on criteria for a welldesigned credit. On the basis of this review, we determined that tax credit 

design, which includes such factors as whether the credit is cost-based or 

performance-based, should be evaluated according to:

• how well the logic of the design is related to the credit’s purpose,

• how likely the design is to achieve that purpose,

• how costly it would be to achieve this purpose using this design, and

• how fairly the credit’s costs and benefits are distributed under this 

design.

Using these criteria, we analyzed the current credit and changes that 

have been proposed to it.

For our second objective—estimating how introducing a base spending 

amount for the 2009 credit may have affected measures such as the 

amount of credit claimed, the revenue cost to the federal government, 

and incentives for taxpayers to increase their spending on energy 

efficiency improvements—we used the Internal Revenue Service’s (IRS) 

2009 Statistics of Income (SOI) database, the most current data 

available, to simulate the effects that different bases would have had on 

credit claimed, revenue costs, and incentives faced by taxpayers, using 

actual spending and purchase patterns from the 2009 credit claims. 

These simulations do not include behavioral responses such as changes 

in the number of claimants and amounts of spending due to the credit. To 

conduct these simulations, we examined two alternative bases: a base 

calculated as a percentage of adjusted gross income (AGI) and a base 

derived from average spending on different types of improvements. For 

this objective, we reviewed documentation for the databases we used, 

conducted electronic checks, and determined that the data presented 

were sufficiently reliable for our purposes.

Throughout this report, the percentage estimates have a margin of error 

of plus or minus 5 percentage points, and the estimates of total amounts 

have a margin of error of plus or minus 5 percent of the estimate.

Scope and 

Methodology 
 

Page 3 GAO-12-318 Nonbusiness Energy Property Tax Credit

We conducted this performance audit from August 2010 to April 2012 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings based 

on our audit objectives.

Under criteria for evaluating a tax credit design, both the performancebased and cost-based credits have advantages and disadvantages with 

neither design being unambiguously the better option based on current 

information. Both a cost-based and a performance-based credit are 

designed to reduce energy use and CO2 emissions by providing 

incentives for energy conservation investment. However, they differ in 

their relative effectiveness and costs. In general, a performance-based 

credit is more likely to effectively reduce energy use and CO2 emissions 

because it rewards energy savings from the investment rather than the 

cost-based credit’s rewarding of spending regardless of whether this 

spending results in energy savings. However, the performance-based 

credit may have significant up-front costs for energy audits, not required 

by the cost-based credit, which could reduce its effectiveness by 

discouraging investment. In addition, for taxpayers who do invest, these 

up-front costs may mean that a performance-based credit may have 

significantly higher taxpayer compliance and IRS administrative costs 

than a cost-based credit. A credit’s fairness depends on subjective 

judgments of how a credit varies with a taxpayer’s income level.

For those taxpayers claiming the 2009 credit, under both base definitions 

used in our simulations, the total amount of credit claimed fell but 

taxpayers had a greater incentive to spend more on qualifying products. 

The incentive was measured as the average effective rate of credit that 

would apply to additional spending by taxpayers. In 2009, when no base 

was present, a dollar of additional spending would earn, on average, an 

additional 10 cents of credit. When the base derived from average 

spending was introduced in the simulations, a dollar of additional 

spending earned an estimated 14 to 18 cents of credit. However, because 

the simulations do not include behavioral responses, the overall effect on 

revenues and spending of introducing a base is uncertain. For example, 

introducing a base amount, while likely to limit windfall credits for qualified 

spending that would have been done anyway, would also make the credit 

less generous and some taxpayers might no longer use it.

Summary
 

Page 4 GAO-12-318 Nonbusiness Energy Property Tax Credit

We are not making new recommendations based on this review. This 

work is intended to assist Congress in considering different ways that the 

credit can be structured to achieve the stated goals of reducing CO2

emissions and minimizing U.S. reliance on foreign energy sources.

The Internal Revenue Service, the Department of Energy, and the 

Department of the Treasury provided us with technical comments after 

viewing a draft of this report, which we incorporated as appropriate.

Unless you publicly announce the contents of this report earlier, we plan 

no further distribution until 30 days from the date of this letter. At that time

we will send copies of this report to other Chairmen and Ranking 

Members of Senate and House committees and subcommittees that have 

appropriation and oversight responsibilities for IRS. We also will be 

sending copies to the Commissioner of Internal Revenue, the Secretary 

of the Treasury, and the Secretary of Energy. Copies are also available at 

no charge on the GAO Web site at http://www.gao.gov. 

Should you or your staff have questions concerning this report, please 

contact me at (202) 512-6806 or mihmj@gao.gov. Key contributors to this 

report were Michael Brostek, Director; Kevin E. Daly, Assistant Director; 

Susan F. Baker; Sara Daleski; Lawrence M. Korb; Jeffrey Schmerling; 

Albert Sim; Ardith A. Spence; and Anne O. Stevens.

J. Christopher Mihm

Managing Director

Strategic Issues

Agency Comments
Appendix I: Briefing Slides

Page 5 GAO-12-318 Nonbusiness Energy Property Tax Credit

Appendix I: Briefing Slides

Energy Conservation and Climate Change: 

Factors to Consider in the Design of 

the Nonbusiness Energy Property 

Tax Credit

1
Appendix I: Briefing Slides

Page 6 GAO-12-318 Nonbusiness Energy Property Tax Credit

Introduction

• Various federal initiatives have sought to address concerns about U.S. 

reliance on foreign energy sources and the impact of carbon dioxide (CO2) 

emissions on the climate. 

• One initiative is the nonbusiness energy property credit (I.R.C. §25C),1 a 

tax credit that could encourage taxpayers to invest in residential energy 

efficiency improvements. 

1Energy Policy Act of 2005, Pub. L. No. 109-58, § 1333, 119 Stat. 594 (Aug. 8, 2005).

2
Appendix I: Briefing Slides

Page 7 GAO-12-318 Nonbusiness Energy Property Tax Credit

Objectives

• To address questions about whether the nonbusiness energy property 

credit is the best or most effective way to encourage investment in energy 

efficiency improvements, GAO was asked to:

– evaluate factors to consider in deciding whether the credit should be 

cost-based or performance-based, and

– estimate how requiring that only spending above a minimum amount 

be eligible for the credit, or introducing a base amount for the 2009 

credit may have affected measures such as the amount of credit 

claimed, the revenue cost to the federal government, and incentives 

for taxpayers to increase their spending on energy efficiency 

improvements. 

• We were also asked for information on use of the credit by spending 

categories and limits. This information is contained in appendix II.

3
Appendix I: Briefing Slides

Page 8 GAO-12-318 Nonbusiness Energy Property Tax Credit

Summary

• Both the performance-based and cost-based credits have advantages and disadvantages with 

neither design being unambiguously the better option given current information.

– The performance-based credit rewards energy savings from the investment rather than, 

as is the case with the cost-based credit, the spending on investment whether this 

spending results in energy savings or not.

– However, the performance-based credit may have significant up-front costs for energy 

audits, not required by the cost-based credit, which could reduce its effectiveness by 

discouraging investment and increase its compliance and administrative costs relative to 

the cost-based credit.

• Under both base definitions used in our simulations, the total amount of credit claimed fell 

and taxpayers who were already investing in qualifying purchases had a greater incentive to 

spend more. 

– For example, in 2009, when no base was present, a dollar of additional spending would 

earn, on average, an additional 10 cents of credit, but when we simulated a base derived 

from average spending, a dollar of additional spending would earn on average an 

estimated 14 to 18 cents of credit.

– However, because the simulations do not include behavioral responses, including the 

decision to make any initial investment, the overall effect on revenues and spending of 

introducing a base is uncertain. 4
Appendix I: Briefing Slides

Page 9 GAO-12-318 Nonbusiness Energy Property Tax Credit

Background—2006 and 2007 Credit

• Enacted as part of the Energy Policy Act of 2005,2 the nonbusiness energy property 

credit was intended to increase homeowners’ investment in energy conserving 

improvements by reducing their after-tax costs.

– In 2006 and 2007, the maximum claimable credit was $500.

• Of this $500, a maximum of $200 could be claimed on exterior windows

• In all years, any credit amounts exceeding tax liability could not be carried forward. 

– The credit was calculated as 10 percent of qualified spending on insulation systems, 

exterior windows, exterior doors, and metal roofs.

– Spending on other types of residential energy property received a 100 percent credit 

but had credit limits by spending category, specifically:

• up to $50 for advanced main air circulating fans used in a furnace;

• up to $150 for furnaces or hot water boilers; and

• up to $300 for heat pumps, central air conditioning systems, or water heaters.

2 Pub. L. No. 109-58, § 1333, 119 Stat. 594 (Aug. 8, 2005). 5
Appendix I: Briefing Slides

Page 10 GAO-12-318 Nonbusiness Energy Property Tax Credit

Background (Cont.)—2009 Credit

• After expiring in 2008, the credit was reauthorized for 2009 and 2010 as part of 

the American Recovery and Reinvestment Tax Act of 2009

– the overall credit limit was raised from $500 to $1,500;

– the rate of credit, which in 2006 and 2007 varied based on the type of 

spending, was set at 30 percent for all types of qualified spending; and 

– credit limits by spending category were eliminated.

• For 2011, the credit was reauthorized at pre-Recovery Act limits and standards.

6
Appendix I: Briefing Slides

Page 11 GAO-12-318 Nonbusiness Energy Property Tax Credit

Background (Cont.)—Taxpayer Characteristics:

Number of claimants, total credit claimed, and total spending in 2006, 2007, 

and 2009

• In 2006 and 2007, over 4 million taxpayers claimed the credit, and in 2009, the number of 

claimants increased to almost 7 million.

• From 2006 to 2007, both spending and credit claimed declined, but in 2009, compared to 

2007 levels, the total spending more than tripled and the credit claimed increased five-fold.

• The increase in total spending in 2009 may be explained in part by a change in the relevant tax 

form’s instructions, which did not limit the amount the claimant could enter on the form for 

categories that were previously subject to limits.

Year

Total tax returns filed

(millions) Total claimants 

(millions)

Total spending 

(millions of dollars)a

Total credit claimed 

(millions of dollars)

2006 138.4 4.3 $7,947 $956

2007 153.6b 4.3 $7,484 $938

2009 140.5 6.8 $25,567 $5,288

7

Source: GAO analysis of IRS data.

aSpending reported to IRS in 2006 and 2007 could not exceed certain category limits; for 2009, no category limits were included in 

the reporting instructions.

bFor 2007, the aggregate number of returns include those returns that were filed solely to receive an economic stimulus payment. 

Excluding these returns, 143.0 million returns were filed in 2007.

3GAO estimates were computed using the SOI advance 2009 Individual Complete Report. In our computations, the nonbusiness 

energy property credit is applied against tax liability remaining after all other credits are taken into account.

Table 1: Total Returns Filed, Claimants, Spending, and Credit Claimed for the 

Nonbusiness Energy Property Credit, 2006, 2007, and 20093

7
Appendix I: Briefing Slides

Page 12 GAO-12-318 Nonbusiness Energy Property Tax Credit

Current Design:

Elements of Both a Cost- and Performance-Based 

Credit

• Cost-based credits provide incentives that are usually a fixed percentage of 

qualified spending, or sometimes, qualified spending above a base amount.

• Performance-based credits provide incentives that are tied to specific measures of 

energy savings.

• The nonbusiness energy property credit combines features of both cost-based and 

performance-based credits.

– It is cost-based in that the amount of credit claimed is directly proportional to 

the taxpayer's qualified spending. 

– It is performance-based in that only certain qualifying purchases are eligible.

8
Appendix I: Briefing Slides

Page 13 GAO-12-318 Nonbusiness Energy Property Tax Credit

Design Evaluation: 

Both performance- and cost-based credits are designed to 

conserve energy and reduce CO2 emissions by subsidizing energy 

conservation investment

• The credit's purpose is to reduce inefficient energy consumption and CO2

emissions. 

• The rationale for providing the tax credit is the view that individuals invest too little from 

society’s point of view when they consider only their own energy cost savings. 

• In addition, there is evidence that taxpayers make too little energy conservation 

investment based on their own energy costs. They do this, for example, when they 

underestimate the savings from future operating cost reductions due to their more 

efficient equipment.

• Both the cost- and performance-based credits address this purpose by providing 

incentives for energy conservation investment.4

– Who actually benefits from the credit depends on its incidence, i.e., the share of the 

credit going to producers and consumers of the improvements. If supply is relatively 

unresponsive to price, a greater share of the benefit would go to producers in the form 

of higher prices. This result may still be consistent with the purpose of the credit if it 

promotes the growth of markets for more energy efficient products.

• Ideally, the credit should be designed to reduce individuals’ costs sufficiently so 

that, in the aggregate, their return on investment equals society’s return in terms 

of energy use and CO2 emission reductions. 

4While both credit designs address the purpose of the credit, they do so indirectly by promoting conservation investment. 

Another, more direct method of reducing energy use and CO2 emissions that has been suggested is a carbon tax on energy 

consumption. 

9
Appendix I: Briefing Slides

Page 14 GAO-12-318 Nonbusiness Energy Property Tax Credit

Design Evaluation: 

The performance-based credit better targets conservation 

investment but its higher initial costs may discourage some 

investment

• For a better chance of producing the intended benefit, the credit should target activities that 

most directly promote the credit’s purpose and provide sufficient incentives for taxpayers to 

increase these activities. 

• The performance-based credit is likely to better target conservation investment spending.

– The performance-based credit provides fixed amounts of credit for achieving different 

levels of energy savings. It therefore provides an incentive for taxpayers to minimize the 

spending required to achieve a given amount of energy savings. The credit is designed to 

reward additional energy savings and CO2 reductions but not additional spending.

– The cost-based credit is designed to reward spending on conservation investment that 

may, or may not, lead ultimately to additional energy savings.

• However, the relative effectiveness of the incentives provided by performance-based and 

cost-based credits is less certain. 

– Performance based credits are likely to have larger up-front costs than cost-based 

credits and may discourage taxpayers from buying qualifying energy savings products.

• These costs include energy audits to establish a baseline of energy use against 

which to measure improvements and possibly post-improvement audits to confirm 

that energy savings have been realized. These added costs could reduce the 

incentive to undertake any investments.

• On the other hand, such audits might also increase participation if they reassure 

taxpayers that they will actually save energy.

10
Appendix I: Briefing Slides

Page 15 GAO-12-318 Nonbusiness Energy Property Tax Credit

Design Evaluation: 

Performance-based credits may have significantly higher 

compliance and administrative costs than cost-based credits 

• To assess the credit design, the benefits likely to be produced by the credit should 

be compared to its costs, which include the lost tax revenue and IRS administrative 

costs as well as more indirect costs, such as taxpayer compliance burden and 

economic efficiency costs.

• Performance-based credits may have significantly higher compliance and 

administrative costs than cost-based credits. 

– Taxpayer compliance costs are higher due to up-front costs, such as energy audits not 

required by cost-based credits. 

– According to IRS officials, administration costs are likely to be higher for performance- based credits that reward measurable (not estimated) increases in energy efficiency 

because examinations would have to verify that improvements were made, not just that 

money was spent.

• The relative economic efficiency costs of the alternative credit designs are 

uncertain because their effects depend on the degree to which the credits alter 

decisions to spend across different improvement types and how much they reduce 

energy use and CO2 emissions. The effects are difficult to infer from design alone.

• The relative effect of a cost-based credit and performance-based credit on 

revenue costs is uncertain because it depends chiefly on whether the credit has 

base amounts and limits and which credit rates are chosen.

11
Appendix I: Briefing Slides

Page 16 GAO-12-318 Nonbusiness Energy Property Tax Credit

Design Evaluation: 

The fairness of how the credit’s costs and benefits are 

distributed depends on subjective value judgments

• The fairness of the credit’s design depends on the judgment of whoever is 

evaluating the design.

– Views on what is a fair distribution of the credit’s costs and benefits can differ 

dramatically across individuals.

• However, whatever one’s views of fairness, an analysis of the distribution of costs 

and benefits by such factors as income level can be useful. 

• Under an ability to pay principle of fairness, fairness requires that those who are 

more capable of bearing the burden of a tax should pay more. Equivalently, for a 

tax credit, they should receive less of the benefit.

– Those who adopt an ability-to-pay principle of fairness may view as unfair a 

distribution where lower income taxpayers receive lower benefits from the 

credit than higher income taxpayers.

• However, under the same principle, fairness requires that taxpayers who have the 

same ability to pay should bear the same tax burden, or in this case, receive the 

same benefit.

– Those who adopt this principle may view as unfair that taxpayers who invest in 

energy conservation have lower tax liabilities than taxpayers with the same 

income who do not invest. 

12
Appendix I: Briefing Slides

Page 17 GAO-12-318 Nonbusiness Energy Property Tax Credit

Introducing a Base:

Credit Design Features

• As currently designed, all qualified spending up to the various limits is 

eligible for the nonbusiness energy property credit. This design increases 

the likelihood of windfall credits being earned for spending on qualifying 

energy efficient investments that would have occurred without the credit.

• A base that would eliminate windfall benefits would reward only the 

additional spending that taxpayers make due to the availability of the 

credit.

– The credit amount would be calculated as the credit rate multiplied by 

the amount of qualified spending in excess of the base amount.

– A base that eliminates windfalls is difficult to determine because it 

requires estimating how much consumers would spend on the types of 

products qualifying for the credit if the credit did not exist.

– Because such a base amount is difficult to determine, other tax credits, 

such as the research tax credit, use proxies for these unknown 

amounts.

13
Appendix I: Briefing Slides

Page 18 GAO-12-318 Nonbusiness Energy Property Tax Credit

Introducing a Base:

Effects on the Use of the Credit

• Introducing a base can affect use of the credit in two opposite ways:

– The base can reduce the take-up rate of the credit, i.e., the number of taxpayers making 

qualifying purchases.

• Because the amount of credit on spending only over a base amount generally 

would be less than a credit on the full amount of spending on a qualifying purchase, 

some taxpayers may choose to make no investment at all.

• Several factors could affect the taxpayers’ decision to invest, such as the amount of 

spending that is "reactive," reflecting investment that cannot be postponed 

because of, for example, equipment failure. 

– The base can increase the amount of spending on qualifying purchases by those who 

choose to invest. 

• For those who have made the decision to invest, i.e., who are “in the market,” the 

base can increase the incentive for additional spending.

– In particular, claimants constrained by credit limits (about 25 percent of 

claimants in 2009) may find that more of any additional spending will be 

eligible for the credit.

• The simulations in this report focus on this second effect and do not include the effects on 

spending due to any change in the number of taxpayers choosing to make an investment.

14
Appendix I: Briefing Slides

Page 19 GAO-12-318 Nonbusiness Energy Property Tax Credit

Introducing a Base:

Determining the Base

• Bases or floors that are currently part of the Internal Revenue Code include amounts 

calculated as a percentage of income (such as the floor on deductions for medical expenses) 

or spending (such as the research tax credit).

• Following this precedent in the code, the base for the nonbusiness energy property credit 

could be calculated as a percentage of each taxpayer’s qualified spending or adjusted gross 

income (AGI).

– This option could reduce the administrative costs of the base because it uses only the 

information reported on tax returns.5

• The base could also be calculated using price information on nonqualifying improvements.

– The rationale is that such prices may be used to better approximate the spending that the 

taxpayer would have done without the credit.

– Department of Energy (DOE) currently collects information on the costs of many types of 

energy efficient home improvements.

– However, DOE indicates that because prices vary so widely across locations, it would be 

very difficult to construct a base from these prices that would apply nationally.

– Setting bases that vary by location and product type would increase the administrative 

costs of the credit.

5the actual spending on qualifying investments would need to be calculated by IRS from information on prior tax year returns.

15
Appendix I: Briefing Slides

Page 20 GAO-12-318 Nonbusiness Energy Property Tax Credit

Introducing a Base:

The Base Used in the Simulations

• To illustrate the effects of introducing a base amount, we recalculated the amount 

of credit taxpayers would have claimed and estimated how incentives to use the 

credit would have changed under alternative base definitions, for the pattern of 

spending observed in 2009.

– Percentage of AGI base: We calculated the AGI base as a percentage of the taxpayers’ 

adjusted gross income where, for each category, this percentage was the average 

amount spent by claimants in 2009 as a share of their AGI. 

– Average spending base: We calculated the average spending base as the average of 

actual 2009 spending in each improvement category.

• It is not known how the credit take-up rate or spending would change if a base 

were introduced. We adjusted the base amount by a range of values--which we 

call the base rates--to show how sensitive our estimates of incentives and credit 

claimed are to the size of the base. The simulations used 25 percent, 50 percent, 

and 75 percent of these category bases as base rates. 

– When implementing a base, policymakers may wish to consider trade-offs between take-up rates 

and incentives for induced spending. All else equal, a lower base may have a less discouraging effect 

on the decision to invest but is more likely to reward spending that would have been done anyway.

• The simulations were run using the 2009 IRS Statistics of Income (SOI) database of 

individual tax returns and show what credit would have been claimed and other 

results if the different bases had been in effect. The comparison of the results of 

the simulations to the actual 2009 data shows the effects of introducing the bases.

16
Appendix I: Briefing Slides

Page 21 GAO-12-318 Nonbusiness Energy Property Tax Credit

Introducing a Base:

Illustration of How to Calculate Credits Using the 

Average Spending Base

• The graph on the next slide illustrates the calculation of the base amount 

for the average spending base.

– The spending type in this example is windows and the amount of qualified 

spending is $4,000.

– Average qualified spending for windows by all taxpayers in 2009 was $3,665.

– The base amount was calculated using the lowest base rate as 25 percent of 

average spending which is equal to $916.

• If this base were implemented, IRS would, based on the most recent tax 

return data available, provide taxpayers the base amount--taxpayers 

would not be expected to calculate this amount.

• The credit is calculated as the difference between the qualified spending 

of $4,000 and the base amount of $916, which is equal to $3,084, 

multiplied by the credit rate of 30 percent, or about $925 of credit.

17
Appendix I: Briefing Slides

Page 22 GAO-12-318 Nonbusiness Energy Property Tax Credit

Introducing a Base: Illustrative Example of a Taxpayer 

Spending $4,000 on Windows (Average Spending Base)

$4,000 $3,084

= $4,000 - $916

$916

= $3,665 x 25%

$925

= $3,084 x 30%

Spending 

on 

windows

Spending 

that 

qualifies 

for credit

Base 

amount

Credit 

earned

$3,075

= $4,000 - $925

Net cost to 

taxpayer

Average spending base (average spending = $3,665; base rate = 25%)

18
Appendix I: Briefing Slides

Page 23 GAO-12-318 Nonbusiness Energy Property Tax Credit

Introducing a Base:

Illustration of How to Calculate Credits Using the 

Percentage of AGI Base

• The graph on the next slide illustrates the calculation of the base amount 

for the percentage of AGI base.

– As in the previous example, the spending type is windows and the amount of 

qualified spending is $4,000.

– AGI for this taxpayer is $25,000 and qualified spending on windows as an 

average share of income was about 5.1 percent in 2009.

– The base amount for this taxpayer, using the lowest base rate of 25 percent, is 

equal to 1.275 percent of $25,000 of AGI (25 percent of the 5.1 percent share 

of income) which is equal to about $319.

• If this base were implemented, taxpayers would be given the percentages 

corresponding to their level of AGI with their tax returns. 

• The credit is the difference between the qualified spending of $4,000 and 

the base amount of $319, which is equal to $3,681, multiplied by the 

credit rate of 30 percent, or about $1,104 of credit.

19
Appendix I: Briefing Slides

Page 24 GAO-12-318 Nonbusiness Energy Property Tax Credit

Introducing a Base: Illustrative Example of a Taxpayer 

Spending $4,000 on Windows (AGI Base)

AGI base (average share of AGI spent = 5.11%; AGI = $25,000; base rate = 25%)

$4,000 $3,681

= $4,000 - $319

$319

= 5.11% x $25,000 x 25%

$1,104

= $3,681 x 30%

Spending 

on 

windows

Spending 

that 

qualifies 

for credit

Base 

amount

Credit 

earned

$2,896

= $4,000 - $1,104

Net cost to 

taxpayer

20
Appendix I: Briefing Slides

Page 25 GAO-12-318 Nonbusiness Energy Property Tax Credit

Introducing a Base:

Illustration of Base Amounts, Qualified Spending, and Credit 

Amounts under Different Base Definitions and Base Rates 

• The table on the next slide shows base spending and credit amounts for the 

average spending base under different assumptions about the base rates.

• The table also shows base, spending and credit amounts for the percentage of AGI 

base under different assumptions about the base rates and AGI.

• The total credit amount declines for both base types as the base rate increases.

• The credit amount for the percentage of income base decreases as income 

increases.

– With the AGI base, a lower-income taxpayer will earn more credit than a higher income taxpayer 

spending the same amount. In the examples, the AGI base equals 5.11% of income multiplied by a 

base rate. For any base rate, the base amount increases as income rises so lower income taxpayers 

have a lower base. In the examples, taxpayers are assumed to spend $4,000 on windows, regardless 

of income, and the amount of spending that qualifies for credit is larger for lower-income taxpayers 

with a lower base. 

21
Appendix I: Briefing Slides

Page 26 GAO-12-318 Nonbusiness Energy Property Tax Credit

Introducing a Base: Illustrative Example of a 

Taxpayer Spending $4,000 on Windows

Average spending base (average spending on windows in 2009 = $3,665)

Base amount 

(by base rate)

Spending qualifying for the 

credit 

(by base rate)

Credit earned

(by base rate)

25% 50% 75% 25% 50% 75% 25% 50% 75%

$916 $1,833 $2,749 $3,084 $2,168 $1,251 $925 $650 $375

Adjusted gross income base (average share of AGI spent on windows = 5.11 percent)

AGI Base amount 

(by base rate)

Spending qualifying for the 

credit 

(by base rate)

Credit earned

(by base rate)

25% 50% 75% 25% 50% 75% 25% 50% 75%

$25,000 $319 $639 $958 $3,681 $3,361 $3,042 $1,104 $1,008 $913

$75,000 $958 $1,916 $2,874 $3,042 $2,084 $1,126 $913 $625 $338

$150,000 $1,916 $3,833 $5,749 $2,084 $167 $0 $625 $50 $0

Source: GAO analysis of IRS data.

22
Appendix I: Briefing Slides

Page 27 GAO-12-318 Nonbusiness Energy Property Tax Credit

Introducing a Base:

Simulated Effects on Credit Claimed and Marginal 

Incentives in 2009 of Alternative Base Definitions

• In 2009, about $5.3 billion was claimed in nonbusiness energy property credit, and 

across all claimants the average marginal incentive was about 10 percent.

– The average marginal incentive is the percentage change in the amount of credit 

associated with an increase or decrease in spending, divided by the percentage change 

in spending, averaged across all claimants.

– In this case, on average, a dollar of additional spending would earn an additional 10 

cents of credit, or equivalently, would reduce the cost of a dollar of additional spending 

by 10 cents.

• In simulations introducing a base spending amount, the amount of credit claimed 

fell, and the average marginal incentive to use the credit rose. 

– Introducing a base amount reduced the revenue cost of the credit to the government 

and simultaneously gave taxpayers a stronger incentive to invest in qualifying energy 

efficiency improvements.

– Because the simulations do not include behavioral responses, the actual effect of 

introducing a base on revenues and spending is uncertain. Taxpayers facing a stronger 

incentive to use the credit may spend more than they otherwise would, increasing both 

the revenue cost of the credit and the amount spent on energy efficiency 

improvements. However, a base would also make the credit less generous overall, 

which could reduce the number of claimants, decreasing both the revenue cost of the 

credit and the amount spent on energy efficiency improvements. 

23
Appendix I: Briefing Slides

Page 28 GAO-12-318 Nonbusiness Energy Property Tax Credit

Introducing a Base:

Simulated Effects on Credit Claimed and Marginal 

Incentives of Alternative Base Definitions in 2009

Base definition

2009 

credit

Simulated credit with 

average spending base

Simulated credit with AGI 

base 

Low–25 

percent

Medium

–50 

percent

High–75 

percent

Low–25 

percent

Medium

–50 

percent

High–75 

percent

Total credit 

earned (billions 

of dollars)

5.3 4.2 3.3 2.6 3.9 2.9 2.1

Average 

marginal 

incentive

10% 14% 16% 18% 15% 18% 21%

24

Source: GAO analysis of IRS data.
Appendix I: Briefing Slides

Page 29 GAO-12-318 Nonbusiness Energy Property Tax Credit

Introducing a Base:

Distributional Effects of the Alternative Bases

• Simulating a minimum spending requirement as a share of AGI indicates that taxpayers with 

between $0 and $80,000 in AGI would claim a larger share of the credit than they actually 

claimed in 2009. For example, in 2009, taxpayers with between $20,000 and $40,000 in AGI 

claimed about 10.2 percent of total credit. In simulations with an AGI base, they claimed 

from about 12.0 percent to about 16.3 percent of total credit, depending on the base rate.

– Taxpayers with more than $100,000 in AGI generally accounted for a smaller share of credit claimed 

in simulations with an AGI base. For example, taxpayers with AGI between $250,000 and $500,000 

claimed about 4.1 percent of credit in 2009 and between 1.5 and 2.9 percent of total credit in these 

simulations.

– Under the AGI base, taxpayers with AGI between $80,000 and $100,000 accounted for about the 

same share of credit claimed as the share of credit they actually claimed in 2009.

• Simulating a base amount derived from average spending on qualifying purchases produced 

an opposite but less pronounced effect on the share of credit claimed by these income 

groups. 

– Taxpayers with AGI between $0 and $80,000 claimed a smaller share of credit than they actually 

claimed in 2009. For example, in simulations with an average spending base, taxpayers with 

between $20,000 and $40,000 in AGI claimed anywhere from about 8.1 percent to 9.4 percent of 

total credit, depending on the base rate, always less than the 10.2 percent of credit they claimed in 

2009.

– Taxpayers with AGI over $100,000 claimed a larger share of credit in simulations with an average 

spending base than they actually claimed in 2009. For example, taxpayers with AGI between 

$250,000 and $500,000 claimed between 4.6 and 5.6 of total credit in these simulations, as 

compared to 4.1 percent of total credit in 2009.

25
Appendix I: Briefing Slides

Page 30 GAO-12-318 Nonbusiness Energy Property Tax Credit

Introducing a Base:

Distributional Effects of the Alternative Bases

• Income Distribution Table

Adjusted gross 

income 

(dollars in 

thousands)

Percentage 

of all 

taxpayers 

with AGI > 

0 in 2009

Share of credit claimed

2009 Simulated credit with an AGI base Simulated credit with an average spending base

High Medium Low High Medium Low

$0-$20 33.7% 0.8% 1.5% 1.2% 1.0% 0.6% 0.6% 0.7%

$20-$40 24.0 10.2 16.3 14.0 12.0 8.1 8.7 9.4

$40-$60 14.1 16.8 22.0 20.2 18.5 14.0 15.0 15.9

$60-$80 9.3 18.4 20.5 20.2 19.5 17.1 17.7 18.1

$80-$100 6.3

15.4 14.8 15.3 15.5 15.2 15.3 15.4

$100-$125 4.7 12.8 10.8 11.6 12.3 13.6 13.3 13.0

$125-$150 2.6 7.9 5.5 6.5 7.2 8.7 8.4 8.1

$150-$250 3.6 12.2 7.2 8.7 10.6 15.0 13.9 13.1

$250-$500 1.3 4.1 1.5 1.9 2.9 5.6 5.0 4.6

Greater than 

$500 0.5 1.5 0.2 0.3 0.5 2.2 1.9 1.7

26

Source: GAO analysis of IRS data.
Appendix I: Briefing Slides

Page 31 GAO-12-318 Nonbusiness Energy Property Tax Credit

Conclusion

• The nonbusiness energy property credit has been claimed by millions of taxpayers since it 

was first introduced in 2006. 

• While making the credit performance based likely would result in greater reductions in 

energy use than does the current credit, the performance based design is not clearly superior 

given current information because the performance-based credit likely would have greater 

taxpayer and government compliance and administration costs. 

• If the cost-based credit is retained and a base spending amount was required, taxpayers who 

make qualifying purchases would have a greater incentive to spend more on such purchases 

and windfall benefits to those who would have made purchases without the credit would be 

reduced. However, a base spending requirement would reduce the absolute amount of credit 

taxpayers receive for qualifying purchases and might therefore result in fewer taxpayers 

making such purchases. 

• Further, a base that excludes only windfall spending is difficult to construct. Proxy bases may 

over- or under correct for windfall benefits. A comprehensive evaluation of proxies for 

windfall spending would assess their effect on windfalls and their net effect on additional 

spending on qualified energy saving purchases.

27
Appendix II: Use of the Credit by Spending 

Categories and Limits

Page 32 GAO-12-318 Nonbusiness Energy Property Tax Credit

Appendix II: Use of the Credit by Spending 

Categories and Limits

Appendix II: Use of the Credit by 

Spending Categories and Limits

28
Appendix II: Use of the Credit by Spending 

Categories and Limits

Page 33 GAO-12-318 Nonbusiness Energy Property Tax Credit

Appendix II: Use of the Nonbusiness Energy Property Credit by 

Spending Categories and Limits

• About 5 million out of 6.8 million total claimants, or about 73 percent of all claimants, 

reported spending on only one type of energy improvement in 2009. Their qualified 

spending of about $16.7 billion accounts for about 65 percent of spending by all claimants. 

• About 1.1 million of these claimants, or about 23 percent, were subject to the overall credit 

limit of $1,500, with close to 400,000 of these returns reporting spending on windows. About 

6% of claimants reporting spending on only one type of improvement had limited tax liability 

that constrained the amount of credit claimed.

• A similar analysis of how spending was affected by limits for claimants reporting spending on 

more than one kind of improvement would be difficult. For instance, it is not possible to 

attribute their limited use of the credit to a particular category of spending, since constraints 

related to the overall credit limit or tax liability depend on total spending in all categories.

• The next three slides show the number of claimants and amount of spending by spending 

categories according to whether taxpayers were:

– unconstrained by any of the credit’s limits

– constrained by the overall limit

– constrained by the tax liability limit

29
Appendix II: Use of the Credit by Spending 

Categories and Limits

Page 34 GAO-12-318 Nonbusiness Energy Property Tax Credit

Appendix II: Use of the Nonbusiness Energy Property Credit

Retrofit type Claimants reporting spending 

on only one type of retrofit

Claimants reporting spending 

on more than one type of retrofit

Number Spending

(in millions)

Number Spending

(in millions)

Insulation

848,490 $947.0 644,100 $453.9

Windows

765,600 $1,605.2 619,284 $726.4

Doors

754,523 $811.3 681,297 $522.3

Roofs

107,659 $291.5 95,388 $136.2

Energy efficient building 

property 387,210 $875.1 132,373 $166.8

Furnaces and hot water 

boilers 608,467 $1251.0 214,217 $256.1

Furnace fans

52,218 $115.3 59,543 $57.2

All retrofit types 3,524,166 $5,896.3 1,060,682 $2,318.9

These tax returns account for about 68 percent of all claimants and about 32 percent of total spending in 2009. Because their use of the 

nonbusiness energy property credit is unconstrained, their credit claimed equals 30 percent of their spending, which is about 47 percent of all credit 

claimed.

Source: GAO analysis of IRS data.

Table 1: Use of the Nonbusiness Energy Property Credit by Unconstrained Claimants in 2009

30
Appendix II: Use of the Credit by Spending 

Categories and Limits

Page 35 GAO-12-318 Nonbusiness Energy Property Tax Credit

Appendix II: Use of the Nonbusiness Energy Property Credit

Retrofit type Claimants reporting spending 

on only one type of retrofit

Claimants reporting spending 

on more than one type of retrofit

Number Spending 

(in millions)

Number Spending

(in millions)

Insulation

107,303 $850.8 281,604 $794.5

Windows

393,447 $3,635.8 425,030 $2,060.9

Doors

21,546 $160.2 319,995 $630.0

Roofs

86,786 $792.1 114,725 $676.5

Energy efficient building 

property 245,143 $1,944.9 139,584 $688.7

Furnaces and hot water 

boilers 237,430 $1,810.5 161,846 $735.7

Furnace fans

33,193 $252.0 54,008 $178.4

All retrofit types 1,124,848 $9,446.3 594,234 $5,764.8

These tax returns account for about 25 percent of all claimants and about 59 percent of total spending in 2009. Because of the overall credit 

limit, their credit claimed is less than 30 percent of their spending and is around 49 percent of all credit claimed.

Source: GAO analysis of IRS data.

Table 2: Use of the Nonbusiness Energy Property Credit by Claimants Subject to the Overall 

Credit Limit of $1,500 in 2009

31
Appendix II: Use of the Credit by Spending 

Categories and Limits

Page 36 GAO-12-318 Nonbusiness Energy Property Tax Credit (450861)

Appendix II: Use of the Nonbusiness Energy Property Credit 

Retrofit type Claimants reporting spending 

on only one type of retrofit

Claimants reporting spending 

on more than one type of retrofit

Number Spending

(in millions)

Number Spending

(in millions)

Insulation

37,837 $118.5 70,361 $118.1

Windows

77,150 $405.5 90,071 $254.5

Doors

29,645 $52.7 82,309 $94.9

Roofs

28,871 $166.9 34,955 $120.0

Energy efficient building 

property 52,861 $276.0 34,693 $95.4

Furnaces and hot water 

boilers 66,366 $296.8 30,112 $54.6

Furnace fans

11,592 $56.9 14,434 $30.0

All retrofit types 304,322 $1,373.3 142,698 $767.7

These tax returns account for about 7 percent of all claimants and about 8 percent of total spending in 2009. Because of limited tax liability, 

their credit claimed is less than 30 percent of their spending and equals about 5 percent of all credit claimed.

Source: GAO analysis of IRS data.

Table 3: Use of the Nonbusiness Energy Property Credit by Claimants with Limited Tax Liability 

in 2009

32
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