Challenge

Residential energy tax credits are a key mechanism for household access to clean energy systems, such as rooftop solar and battery storage, and energy efficiency upgrades for building envelopes as well as efficient furnaces, electric heat pumps, and other energy-saving technologies. For decades, until being repealed by the One Big Beautiful Bill Act (2025), federal tax credits have subsidized such household clean energy goods and advanced their proliferation in the residential sector. However, these credits were poorly designed for equity and mainly benefited affluent households.¹ 

Policy Solution

State-level versions of residential energy credits can fill what is now a critical gap in household clean energy finance while also rectifying persistent equity shortfalls in their conventional design.

Model Policy Features

Key policy components that make this solution effective include:

• The credits are made refundable, which means that households with little or no state income tax liability can potentially fully benefit from the subsidies in the form of a tax refund equal to the amount of the credit exceeding taxes owed.²
• The credits have a progressive rate structure, with higher subsidies for lower-income households, thus additionally reducing costs for these households.
• Access to the credits have an income cap (e.g. $100,000) to eliminate inefficiency of credits going to people who do not need them and to reduce the overall cost of the program.
• Credits are transferable at the point of sale to certified vendors so that upfront cost barriers for lower-income households are reduced.
• Credits for leased rooftop solar systems are shared between lessors and lessees through a discount applied to reduce leasing costs.     
• Applying for credits is made as easy as possible, with accessible, simple forms and clear instructions in multiple languages.

Potential Policy Drawbacks and Pitfalls

• Relative to state tax rates, if the program retains federal credit subsidy levels it could be expensive. 
• A refundable credit still excludes people who don’t file a tax return, although availability of the Earned Income Tax Credit limits the pool of non-filers. 
• As compared to point-of-sale rebates, traditional tax credits can pose a challenge to lower-income households if they have to pay up-front costs in full. But the policy solution of progressive residential credits solves that problem, as noted, by establishing point-of-sale transferability of the credits.  
• The likely dropoff in residential clean energy deployment (as well developer sales and jobs) with the repeal of the federal tax credits is a large gap for states to fill on the same scale as was historically the case with the federal credits, which were worth nearly $50 billion to households in the period between 2009 and 2021.³

Complementary Policies

• To close the significant clean energy affordability gaps for low-income households, state energy tax credits should be fully “stackable” with other benefits such as federal home energy rebates and utility-administered bill credits.
• In order to track and evaluate performance of state energy tax credits, routine data collection from tax returns should be required to assess distributional, geographic, and other social impacts of the program.

Additional Information: As of the Fall of 2025, no state has adopted a framework of refundable, progressively structured residential energy tax credits as a financing tool comparable to the now-repealed federal credits. Point-of-sale incentives such as rebates and sales tax exemptions are much more common. However, in 2025, New York amended its residential ground-source geothermal system tax credit to make it refundable and therefore potentially more inclusive of lower-income households.