Think Handouts to Rich Electric Vehicle Buyers Are Unfair? Check Out the Inflation Reduction Act’s Homeowner Tax Breaks

The Manchin-Schumer Inflation Reduction Act of 2022 extends the current tax credits up to $7,500 for electric vehicles (EVs). Among the many flaws with this tax break is its regressive nature given that most EV buyers are considerably wealthier than average. But even more unfair are the lucrative tax breaks for homeowners who make environmentally correct investments in their homes.

The bill has a long list of incentives in the name of making homes more energy efficient. For example, there are tax credits up to $600 per year for installation of government-approved energy-saving windows and another $500 for doors. These and other tax breaks extend through 2031.

The bill also doles out billions more to states with instructions to give rebates of up to $14,000 to homeowners who make certain improvements. This includes as much as $8,000 for a new heat pump (it looks like heat pump makers have better lobbyists than the auto industry, which only got $7,500 per unit, subject to several conditions).

Researchers have questioned whether such programs really save much energy. In  fact, if the energy savings were substantial, these investments should pay for themselves. The fact that generous government incentives are needed gives reason to doubt that they do.

In addition to the stated goal of improving home energy efficiency, many of these incentives are geared toward encouraging homeowners to switch from natural gas to electricity. Some appliances—furnaces, stoves, water heaters, clothes dryers—come in both natural gas and electric versions. Many homeowners prefer natural gas appliances because they cost a lot less to run than their electric counterparts, and quite a few cooks find natural gas stoves superior to electric ones. But climate change activists have declared war on the use of natural gas, and this is reflected in some of the incentives in the bill that apply to electric versions only. This includes $840 rebates for electric cooking products. There is also money to improve home wiring so it can handle a higher electric load. Why Sen. Joe Manchin (D-WV) would endorse a shift away from residential use of natural gas in favor of electricity when his home state sits atop a gold mine of natural gas is surprising.

Who pays for all this? Just as the tax credits for EVs don’t magically make $7,500 in costs disappear but merely shift those costs from EV buyers to taxpayers in general, these tax breaks and rebates for homeowners are paid for by everyone else. To qualify for them you first need to own a home, which means that renters, who are generally less well off than homeowners, are footing much of the bill. And among homeowners, it is likely that the benefits are skewed towards the wealthier ones who live in high-value homes. Researchers have shown than the poorest 60 percent of American households have availed themselves of only 10 percent of such energy tax credits in the past.

One of the big stories of 2022 has been the disproportionate impact on working-class households of climate change measures such as those that are contributing to high gasoline prices. Now the homeowner rebate provisions and other measures in the Inflation Reduction Act take regressive climate policy to a whole new level.