This week, House Republicans unveiled their much-anticipated tax package, and the news was not great for HVAC tax credits.
The 389-page bill included the repeal of two major HVAC tax credits that address residential energy efficiency improvements. This includes the Section 25C tax credit for HVAC systems, also known as the Energy Efficient Home Improvement credit.
While this was first introduced in the Energy Policy Act of 2005, it was significantly expanded on Jan. 1, 2023, following the passage of the Inflation Reduction Act. This expansion provided homeowners with a tax credit of up to $3,200 per year (30% of the cost of qualified improvements) for items such as heat pumps, home energy audits, and air sealing and insulation.
The proposal would repeal the tax credit at the end of 2025. It has been scheduled to run through 2032. More than 2.3 million American households took advantage of the 25C homeowner efficiency improvement credit in 2023, taking an average credit of nearly $900.
Also being affected would be the Residential Clean Energy Credit (25D), which is a federal incentive to encourage homeowners to invest in renewable energy systems, including geothermal. The credit is equal to 30% of the total cost (including labor and installation) for eligible systems installed between 2022 and 2032. Unlike some other tax credits, the 25D credit has no annual or lifetime dollar limit.
“Tax credits for geothermal heating and cooling systems have historically enjoyed strong bipartisan support that existed long before the Inflation Reduction Act. It is unfortunate that, due to the highly partisan nature of Washington these days, the House Ways and Means committee inadvertently threw the baby out with the bathwater,” said Ryan Dougherty, executive director at Geothermal Exchange Organization (GEO).
This is not the first time these tax credits have gone away for the geothermal industry since their inception in 2006. In 2017, a clerical error left geothermal out of a renewable tax credit. Geothermal technology was not eligible for the tax credits that year, while solar and wind were. As a result, in 2017, geothermal sales dropped by 50%.
“We cannot let that happen again, and GeoExchange will be working around the clock to see residential credits restored in the final package,” Dougherty said. “It is important that Congress recognizes the relatively low cost of geothermal credits is far outweighed by the return on that investment. Geothermal systems lower consumer energy expenses, foster domestic manufacturing and workforce, and strengthen our nation’s electric grid. If we are serious about energy dominance, Congress must support the geothermal industry.”
In 2023, 1.2 million American families took advantage of the residential clean energy tax credit.
“Without this tax credit, the upfront cost of geothermal systems would become less competitive, likely resulting in reduced installations, job losses, and a slowdown in the industry’s momentum toward broader clean energy adoption,” Joe Parsons, senior marketing sustainability manager of Climate Control Group, said. “U.S. manufacturers of geothermal heat pumps and drilling equipment, loop installers, and HVAC distributors and contractors who have invested heavily to meet the surge in consumer demand since the credits were implemented in September 2022 now face instability and market disruption, undermining the confidence that federal incentives had helped establish.”
The U.S. Green Building Council (USGBC) is calling on Congress to reject proposed budget reconciliation legislation that would repeal critical federal tax incentives and other initiatives that promote energy affordability, grid reliability, and job creation.
“A vote to repeal these tax incentives is a vote to raise energy costs for millions of American households and businesses while discouraging billions of dollars of investment in the construction and real estate sectors, all at a time when we are seeing clear signs of a slowing economy and pinched pocketbooks.” Elizabeth Beardsley, senior policy counsel at the USGBC, said of draft legislation under consideration in the U.S. House of Representatives.
“Businesses need certainty to invest and grow,” Beardsley said. “This proposal instead pulls the rug out from thousands of homebuilders, real estate companies, and others who have planned around using these tax incentives to make investments. If these drastic changes are enacted, projects will be canceled. Investment will slow. And the people who will lose out the most are workers in the building trades — the construction workers, electricians, heating and air conditioning contractors, and others in every state, across the country.”
The proposed bill will most certainly change as it progresses through the legislative process. Republicans are aiming to send it to the Senate by Memorial Day.