To encourage Americans to install more solar, the federal government provides a tax break to households that put solar systems on their roofs. This tax break, known as the Section 25D residential solar Investment Tax Credit, is the cornerstone of national public policy for rooftop solar.
Unfortunately, many Americans — especially low-income households — aren’t able to take full advantage of the residential solar Investment Tax Credit. Since the solar tax credit can only offset taxes owed and any excess amount can’t be refunded as a payment to the taxpayer, only households that owe enough in taxes receive the full value of the tax break. Households that owe fewer or no federal taxes aren’t able to benefit fully from the financial incentive, as wealthier and higher-income households can, keeping solar out of reach for many.
To fix this, the 30 Million Solar Homes initiative, the Residential Renewables for All coalition, and other advocates are pushing for a direct pay option for the residential solar tax credit to be included in the infrastructure legislation Congress is currently debating. (ILSR supports both groups.) This would make solar tax incentives more equitable by allowing households to receive the full value of the credit as a single, direct payment instead of only reducing taxes owed, bringing the benefits of solar energy to more Americans.
Here are 25 reasons why Congress should make solar tax incentives more equitable by creating a direct pay option for Section 25D residential solar tax credits:
- The solar Investment Tax Credit is one of the most impactful federal solar policies. Since it was first offered in 2006, solar deployment has expanded by more than 10,000 percent. Despite it being the main federal solar incentive, many American households still can’t take full advantage of the solar Investment Tax Credit.
- A direct pay option would help millions of households with moderate, low, or no tax liability benefit fully from the solar Investment Tax Credit. According to estimates from RMI, around seven in ten households can’t use the full value of the tax credit and four in ten households can’t benefit at all from the credit, based on their average tax liability.
- The Biden Administration has committed to an equitable transition to clean energy. As part of the Justice40 Initiative, the administration has pledged to direct 40 percent of the benefits of certain federal investments to disadvantaged communities. This commitment to equity should extend to tax incentives, like the solar Investment Tax Credit.
- More equitable tax incentives would help Americans of all incomes and colors benefit from solar energy. The current federal tax incentive for solar disproportionately benefits those with higher tax liabilities, such as wealthy households (which are more likely to be white, as a result of racial wealth gaps). A direct pay option for the solar Investment Tax Credit under Section 25D would enable more low- and moderate-income and low-wealth households to enjoy the benefits of solar energy too.
- Making the solar Investment Tax Credit more accessible could reduce existing disparities in solar adoption. Data from Lawrence Berkeley National Laboratory shows that solar adopters tend to have higher incomes and live in communities with greater white and Asian populations.
- Failure to make the residential solar tax credit more equitable increases wealth disparities. According to a recent paper from the RAND Corporation, the current tax incentive structure, which primarily benefits the top 50 percent of income earners, “directly contributes to the widening wealth gap in the United States.”
- A direct pay option gives households the full benefit of the solar tax credit in the first year. Even households that owe enough federal taxes to use the full value of the credit may need to spread it out over multiple years. A direct pay option for the solar Investment Tax Credit would let households receive the entire incentive in a single year, making it more financially feasible to invest in solar.
- More accessible tax incentives would increase solar adoption. Providing a direct pay option for Section 25D of the solar Investment Tax Credit would make investments in solar energy more affordable for a greater number of households, growing rooftop solar.