Barriers to efficiency investments are embedded in the current tax code and, with tax reform likely to be on the agenda in 2013, the American Council for an Energy-Efficient Economy (ACEEE) is investigating ways taxes can better support energy efficiency.
Its second working paper in a series on tax reform and energy efficiency, Modifying How Energy Costs Are Treated for Business Tax Purposes in Order to Remove Barriers and Increase Energy Efficiency, identifies several disincentives to energy efficiency investments in the current tax code. Energy bills count as business expenses and are subtracted from taxable income, meaning the federal government is effectively paying 25 to 35 percent of each business’s energy costs – enabling higher consumption.
But when companies do invest in energy efficiency, a portion of their savings goes to the government in the form of higher taxes. And expenses from capital investments must be depreciated, so companies can only recover the investments gradually.
ACEEE presents examples to show what tax code changes might spur energy efficiency investment while keeping in step with the key goal of national tax reform – simplifying the tax code. A “simple but radical” approach, ACEEE says, would shift business taxes to focus on income, not expenses. In this way, a lower energy bill would not impact taxable income.
A more surgical approach would be to reduce the amount of energy costs that companies can deduct, perhaps only allowing them to deduct the portion of energy costs that exceed four percent of revenues, and even then only deducting 80 percent of energy costs. This threshold would allow energy-intensive industries to receive some deduction, while excluding most businesses.
A third approach – more complex, but perhaps more elegant, ACEEE says – is to develop a standard energy cost deduction for each type of business. Companies with above-average energy expenditures would have to pay taxes on their extra energy costs, while those with below-average costs could claim higher business expenses than they actually had.
This tax approach would reward businesses that operate with below-average energy costs for their industry, while penalizing businesses that consume large amounts of energy.
ACEEE invites comments on its tax reform papers via email, at firstname.lastname@example.org.