This article was originally published in the May/June 1993 issue of Home Energy Magazine. Some formatting inconsistencies may be evident in older archive content.
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Home Energy Magazine Online May/June 1993
TRENDS IN ENERGY
Trends in Energy is a bulletin of residential energy conservation issues. It covers items ranging from the latest policy issues to the newest energy technologies. If you have items that would be of interest, please send them to: Trends Department, Home Energy, 2124 Kittredge St., No. 95, Berkeley, CA 94704.
IRS To Lose Its Slice of Utility Rebates
Residential utility customers who receive rebates for installing energy-efficient appliances in 1993 will no longer have to share a cut with Uncle Sam because under the newly enacted Federal Energy Policy Act, the rebates aren't taxable. This is welcome news for utilities since customers usually respond more strongly to the initial costs of conservation programs when deciding whether to participate in them.
We're finally getting tax policy in sync with environmental policy and with good energy policy, says Jim Wolf, executive director of the Alliance to Save Energy. The fact that utility rebates for energy-efficient measures were classified as taxable income was a huge disincentive for homeowners, says Wolf.
Under a previous ruling, rebates totalling over $600 were considered miscellaneous income by the Internal Revenue Service. They were viewed differently than automobile rebates which are considered price reductions--rather than cash payments from a third party. Yet utility rebates often appear as discounts on contracts, and are not perceived as income by customers.
The new regulations make 100% of such rebates tax-exempt for residential consumers. Industry groups lobbied to have the regulations back-dated to exempt 1992 rebates, but were unsuccessful. Over half of all consumers are served by utilities that offer such rebates, and direct payments by investor-owned utilities for conservation rebates were about $435-$440 million in 1992, the Edison Electric Institute estimates.
The issue of the tax status of utility rebates arose after the National Energy Conservation Act of 1978 expired (see DOE Reviews Rebate Taxation, HE, Nov/Dec '90 p. 9). The IRS later ruled that utility rebates failed to meet the definition of standard rebate (like a car rebate) because the utilities were not actually providing the merchandise as a manufacturer (see Will Taxes Still Bite Into Rebates, HE, May/June '91, p.11).
Utilities have since tried to make it clear to customers that the rebates are treated as taxable income, but apparently the message hasn't always been well delivered or well remembered by customers. It's certainly unwelcome news to energy consumers when they see that a utility rebate was somewhat of a mixed blessing, says Winston Ashizawa, deputy assistant manager of the Sacramento Municipal Utility District. Ashizawa says he has received letters from customers angry about the tax policy.
For instance, one customer wrote a letter complaining about a $900 rebate for a heat pump. We did not need this. We could have paid the full amount of the cost of the heat pump and installation without the rebate, wrote the customer. Now we have to show `income' on a rebate, which we thought was such a good thing.
The American Council for an Energy-Efficient Economy estimates that the new tax-exempt treatment of utility rebates could increase the budget of utility conservation programs nationwide by $250 million a year by the year 2000 and $500 million by the year 2010. With this assumption, the estimated energy savings are 30 million kWh per year by 2000, 180 million kWh a year by 2010, 90 million kWh cumulative during 1993-2010, and 1,150 million kWh cumulative during 1993-2010.
Commercial and industrial consumers will still be taxed for utility rebates under the new regulations. Rebates will remain fully taxable until 1995, when 40% of the value of such rebates are excluded. After 1996, 65% of the rebates will be deductible for commercial and industrial customers. The Joint Committee on Taxation, which provides all revenue estimates for Congress, estimates that the revenue loss to the federal government brought about by the change in utility rebate tax status for residential and commercial customers alike will be $456 during 1993-97.
The rebate provides a marketing signal, concludes Ashizawa. So this takes the bad news out of conservation incentives.
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