Energy Credits for Low-Income Taxpayers Should Be Easy to Get

The IRS is set to unveil the application portal for another clean energy initiative under the Inflation Reduction Act in the coming weeks. The Low-Income Communities Bonus Credit provides an additional bonus on top of existing clean-energy credits for low-income and tribal communities and low-income households that invest in qualifying projects.

The enhancements can be worth 10 to 20 percentage points for qualified energy projects and can help defray a substantial portion of the cost inherent in spooling up a solar or wind energy installation in underserved communities. However, the initiative has notable limitations, and offsetting the effects of climate change and high energy costs in low-income communities doesn’t necessitate locating clean energy facilities in those communities.

The focus should instead be primarily on the most efficient strategy for generating renewable energy, placing and sizing facilities where they can generate the most electricity, and then distributing the financial benefits to low-income communities. This is not only more efficient from an energy-generation perspective—it also aggregates the burden of building a qualified installation and applying for the credits across many taxpayers.

Community clean energy programs are shared solar or wind installations where multiple participant-investors can purchase or lease a share of a centralized clean power installation. The participant-investors then receive credits on their electricity bills for the energy produced by their share of the solar array, despite that electricity not being directly used to power their homes or businesses.

Under current IRS guidance, taxpayers are eligible to take Section 25D residential clean energy credits for investments in community solar programs for up to 30% of their expenditure. Earlier in the year, the Treasury Department released final regulations outlining how community solar and wind facilities with an output of less than 5 megawatts and located in an underserved community can qualify for the bonus credit as well.

They briefly mention of so-called Category 4 facilities, which are qualified low-income economic benefit projects designed to provide economic benefits to underserved communities while not necessarily being located in those communities. Category 4 facilities should be the central pillar of this bonus credit program, which can be refined to enable low-income households to effortlessly receive the bonus credit for any investments made in a qualified project regardless of its location or size.

The program aims to offset energy expenditures for low-income communities and ameliorate the effects of climate change on those same communities—neither of those efforts are served better by the project being located closer to the energy consumer. Further, we needn’t rely on geographic-based income stratification when the rebates can be tied to an individual taxpayer’s gross income and achieve the same goals with much higher accuracy.

Wind turbines at a wind farm in Rio Vista, Calif., on March 30, 2021.

Photographer: David Paul Morris/Bloomberg via Getty Images

Offsetting Administrative Overhead

Additionally, the administrative overhead associated with applying for programs similar to the Low-Income Communities Bonus Credit Program can’t be overstated. The application process would pose a significant barrier to entry for communities or organizations with limited resources. The requirements are designed to ensure the viability and legitimacy or proposed projects, but absent initiatives to assist applicants in filing, they may inadvertently favor applicants with more substantial financial backing and administrative capacity.

The program and its applicants could benefit from a more streamlined procedure and guidance to assist applicants in navigating the process. Barring that, offering workshops, webinars, or additional guidance documents could help level the playing field in terms of applications.

Possible Improvements

To foster a more comprehensive and effective bonus credit system, it’s imperative to involve a diverse group of stakeholders, including state and local governments, private sectors, and community leaders.

Properly rolling out a bonus credit program for underserved communities isn’t a task for just the IRS—we need a collaborative approach involving both federal and state agencies. This will enable the development of guidelines that have the best chance of meeting the needs of individual communities.

Further, this needn’t be a government-only initiative. Public-private partnerships, such as additional programs incentivizing private company investments in community solar and wind projects through tax breaks or grants, could help. We could also make the building of underserved community economic benefit programs a good investment, assuming proper policing and assurances that benefits are redounding to underserved communities and households.

Ultimately, these projects will benefit from community engagement at every stage. Community members know their own needs and can provide valuable insights into local contexts. Their guidance should be heeded to help tailor the projects as well as the tax credit regime—for instance, surveys from existing community solar projects found that lower income households were more likely to be motivated to invest in community programs for environmental benefit reasons, rather than cost-savings.

Let’s not make presumptions about the motivations of low-income communities or impose cumbersome requirements. Instead, it would be more beneficial for tax policy to actively engage with these communities to understand their needs and motivations.

Look for Leahey’s column on Bloomberg Tax, and follow him on Mastodon at @andrew@esq.social.