STATE OF OREGON DEPARTMENT OF ADMINISTRATIVE SERVICES. DATE: April 4, Governor Kate Brown. Patrick Heath, Policy and Budget Analyst

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1 STATE OF OREGON DEPARTMENT OF ADMINISTRATIVE SERVICES DATE: April 4, 2016 TO: Governor Kate Brown FROM: Patrick Heath, Policy and Budget Analyst SUBJECT: Residential Energy Tax Credit Administration Issue: How should the Department of Energy s Residential Energy Tax Credit (RETC) program be administered in light of the Department s financial and operational challenges? Discussion: The RETC is a credit against personal income taxes for constructing or installing an energy saving device in a residence. The program started in 1978 as a response to the energy crises of the 1970s. The value of the credit varies by device, but in general it is the lesser of 50% of the cost of the device or a fixed amount set by the Department of Energy. The Department reports that since inception the program has provided 570,000 tax credits worth $172 million that saved enough energy to serve about 400,000 households for a year. Quantifying the benefits of the RETC in any given year is problematic because data is not available on the actual energy savings realized. Currently, RETC beneficiaries primarily use the credit for installing energy-efficient heat pumps, furnaces and solar photovoltaic panels. The Department of Revenue estimates the credit cost the state $26.0 million in the biennium, and will cost $31.5 million in The tax credit will sunset on December 31, The purpose of the RETC is to promote residential energy savings and to transform the market for high-efficiency equipment by encouraging the purchase of energy efficient devices and renewable energy systems. Investments in residential energy efficiency and renewable energy directly benefit homeowners, renters, and the energy efficiency contractors and suppliers. These purchases also have important benefits for Oregon and the region by reducing the need for new electric generation. Theoretically, RETC blends the homeowner s investment with other incentive programs to achieve more energy efficiency and renewable energy than any of these efforts could achieve alone. Also, by increasing purchases of energy efficient products and supporting emerging technologies, RETC helps transform markets to bring down costs and reduce the incentives needed for continued uptake of successful measures in the future.

Discussion: The RETC is a credit against personal income taxes for constructing or installing an energy saving device in a residence.

2 Currently, the RETC credit is administered by a combination of the Department of Energy, the Department of Revenue, and private entities. See the table below for a summary of how the credit is administered according to statute: Step Action Taken Responsible Party 1 Adopt rules prescribing minimum performance criteria Department of Energy 2 Establish rates for calculating credit amounts Department of Energy 3a Certify device as meeting energy-efficiency standards Department of Energy 3b Apply for contractor system certification; mandatory if installing at least 12 certified devices in one year Contractor 3c Award contractor system certification to contractors who install devices certified by ODOE Department of Energy 4 Install device and apply to ODOE for device system certification, or have device installed by contractor with contractor system certification. Taxpayer 5 Issue device system certificate to taxpayer who installs device Department of Energy 6 Create form for taxpayer to file Department of Revenue 7 Complete form and submit with tax return along with copy of device system certificate or contractor system certificate Taxpayer 8 Review filed forms and apply tax credit Department of Revenue An alternative administrative structure for RETC could seek to accomplish several goals: (1) provide a more efficient process for administering the credits, (2) increase accountability to elected officials and to the public, and (3) maintain energy-specific policy expertise to drive further improvements in energy efficiency. Options There are six options considered below for the future of the RETC program. All of the options below assume that Department of Energy will maintain a role in rule making, creating a list of certified devices (or contractors), and providing rates at which the credits can be claimed for specific devices. One risk common to these options is that separating the administration of the credit from the policymaking aspects will reduce the responsiveness of credit policymaking. For instance, widespread fraud or changes in the market for this class of equipment may not be noted or incorporated as quickly because the agency processing applications may not have the same information as the policymaking agency.

Energy 2 Establish rates for calculating credit amounts Department of Energy 3a Certify device as meeting energy-efficiency standards Department of Energy 3b Apply for contractor system

3 1. Maintain the status quo: Keep the credit and current administrative setup described above. The RETC credit currently functions relatively well. It may be difficult to argue for the program s extension at ODOE given the response to the failures of the Business Energy Tax Credit (BETC). The political environment faced by the agency magnifies the impact of administrative errors It is difficult for the agency to demonstrate a return on investment for the $31.5 million the state provides to program participants. 2. Allow the credit to sunset: Keep credit functioning as it is and allow it to sunset at the end of December Pros: This option saves money. The credit will cost an estimated $31.5 million in Does not require legislative action. Allowing the program to sunset reduces external pressure on the agency. Cons: Deprives the state of a tool to reduce energy use and carbon reduction May be politically unpopular with supporters of the credit. 3. Allow the credit to sunset and reinvest the savings in a grant or rebate: The grant or rebate would be designed to achieve similar energy or climate change objectives. The new program would be administered by another department or a third party. Possible candidates include Business Oregon or Oregon Housing and Community Services, but should be vetted by stakeholders. Pros: Making the benefit a grant or rebate (instead of a tax credit) would subject it to appropriation, increasing accountability and legislative control over program. Purchasers would receive money faster than if they claimed the credit on their tax return in the following year. The benefit will not be dependent on whether the purchaser had a tax liability. The grant or rebate would also eliminate transferability issues associated with the current credit. Cons: The transition could cost money, as taxpayer s claims for credits would overlap somewhat with grants or rebates issued. Requires a more substantial legislative change. Would need an appropriation every biennium as opposed to review by the Joint Tax Credit Committee every 6 years. This new program would require a reliable funding source as current support is provided

The political environment faced by the agency magnifies the impact of administrative errors It is difficult for the agency to demonstrate a return on investment for the $31.

4 by the US Department of Energy and would not be allowed at any organization other than ODOE. Options 4-6: For the remaining options, the only administrative step that would change would be the certification of the credit. Other functions, like rule making and calculating the credit, are core policy functions that would remain with Department of Energy. 4. Have Department of Revenue issue tax credit certificates: Keep Department of Energy in the policy-making role of rule-making and calculating credits but have the Department of Revenue issue the tax credit certificates based on rules and rates established by Energy. The Department could switch from the current system of auditing credits after the fact to a processing-driven review of the credit before being issued a certificate. Would require relatively few legislative changes to the program as it exists. Would take non-essential administrative functions away from Department of Energy. Adding more upfront review could reduce opportunities for fraudulent applications. The Department of Revenue does not have any energy-related expertise to run the program. There is a conflict of interest between the roles of issuing credits and auditing tax returns on the back end. If a front-end review is introduced it could lead to delays in approval of credits compared to the current process. Most of the efficiencies from moving the certification to the Department of Revenue would come from administering the credit through Gentax. However, adding this new work to the scope of Gentax could jeopardize the schedule for the project, while waiting until after Gentax is implemented would cost more. May not be sufficient to relieve external pressure on Department of Energy. 5. Have another Department issue tax credit certificates: Same as above, but substitute another Department (possibly Business Oregon or Housing and Community Services, both of which currently certify tax credits) for Department of Revenue. Easy to implement Would take non-essential administrative functions away from Energy The new Department would not have much energy-related expertise to run the program The administration of this credit is of a different order of magnitude than the other credits these departments currently administer, likely resulting in a fiscal impact and possibly the need for new information technology resources. The RETC program currently processes 15,000 applications per year, far exceeding any of the credits currently administered by these departments

Other functions, like rule making and calculating the credit, are core policy functions that would remain with Department of Energy. 4.

5 May not be sufficient to relieve external pressure on the Department of Energy 6. Stop certifying the credit at all: Maintain the status quo, except change the law to stop certifying the credit. Enforcement would be by auditing on the back end. Easy to implement. Would take non-essential administrative functions away from Energy. Audit staff may not know enough about energy to determine whether the taxpayer qualifies for the credit. Additional instructions and enforcement may be needed in order to ensure taxpayer understanding and compliance. Increases the possibility of fraud. May not be sufficient to relieve external pressure on the Department of Energy.

Easy to implement. Would take non-essential administrative functions away from Energy.

ENERGY, DEPARTMENT of

ENERGY, DEPARTMENT of Annual Performance Progress Report (APPR) for Fiscal Year (2012-2013) Original Submission Date: 2013 Finalize Date: 8/29/2013 2012-2013 KPM # 2012-2013 Approved Key Performance Measures (KPMs) 1 1 1 1