| COMMUNITY BENEFIT | Affordability, Decarbonization |
| KEYWORDS | Efficiency, Tax policy, Distributed energy, Clean energy |
| REGION | State |
| AFFORDABILITY STRATEGY | Funding and Financing, Residential Decarbonization |
| OVERSIGHT | State Tax Departments |
| POLICY MECHANISM | Legislation |
Why This Matters
Residential energy tax credits are a key mechanism for household access to clean energy systems, such as rooftop solar and battery storage, energy efficiency upgrades for building envelopes, and electric heat pumps. For decades, until being repealed by the One Big Beautiful Bill Act (2025), federal tax credits have subsidized such household clean energy goods and advanced their proliferation in the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 apply to the purchase or installation of clean energy measures including, but not limited, to solar, energy storage, heat pump space and water heaters, weatherization, and electrical panel and wiring upgrades needed to accommodate these measures.
- 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.
- 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.
- 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 state-administered, federally-funded Weatherization Assistance Program grants and Home Energy Rebates.
Potential Limitations & 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
Comparative state income tax analyses of zero- or low-tax households are not available, and nine states do not impose income taxes, so it is unclear how many households nationally could benefit from the proposed policy. Tax incidence data compiled by the state of Minnesota indicate that, as of tax year 2018, approximately 29%t of tax units had zero or negative state income tax liability after accounting for refundable credits. See Minnesota Department of Revenue. (2022). How Many Minnesotans Pay No State Income Tax?
Complementary Policies
A number of policies support the effectiveness of state progressive residential energy tax credits, such as:
- Pre–weatherization and pre-electrification programs to enable home upgrades for low- and moderate-income households who need repairs before they can implement clean energy measures.
- Residential solar and storage programs, residential weatherization programs and efficient electrification programs that provide grants or financing for clean energy measures and which are designed to be stackable with tax credits.
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.
Resources
- On equity issues and other challenges with the federal residential energy credits, see:
- Daly, L. and Chi, S. (2022). Clean Energy Neoliberalism: Climate, Tax Credits, and Racial Justice. The Roosevelt Institute.
Written: October 2025
- Borenstein, S. and Davis, L. (2024). The Distributional Effects of U.S. Tax Credits for Heat Pumps, Solar Panels, and Electric Vehicles. UC Berkeley Energy Institute at Haas. ↩︎
- Roughly 40% of households have zero or negative federal income tax liability (because they take other refundable credits such as the Earned Income Tax Credit), and many more do not have sufficient federal income tax liability to fully benefit from residential energy tax credits. See: Gleckman, H. (2022). TPC: The Number of Those Who Don’t Pay Federal Income Taxes Drops to Pre-pandemic Levels. Tax Policy Center. ↩︎
- Borenstein, S. and Davis, L. (2024), op. cit. ↩︎