Monday, December 6, 2010

Long Live the Existing Homes Tax Credit!

I will concede to my Republican friends that there are tax cuts which serve as such a strong incentive to potential consumers that they do stimulate economic activity. I will agree that Congress ought to extend these tax cuts in order to help small businesses weather this deep recession, to create jobs and to reduce the federal deficit – and that it is imperative that they extend these tax cuts as soon as possible so that they don’t expire with the coming new year. In fact, I think that these tax cuts ought to be made permanent.

I’m not talking about the Bush tax cuts, of course. Across-the-board reductions of the income tax rate for the very richest households are amongst the most ineffective job creation policies imaginable because they are absolutely unconditional to any sort of consumer spending, business investment or other job-creating activity. Moreover, these sorts of tax cuts are even more ineffective when they are showered upon those millionaires and billionaires who respond to incentives the least and are more likely to save their tax windfall than to spend or invest it. This is why few economists unaffiliated with the Heritage Foundation or Regent University will tell you that extending the Bush tax cuts to the year 2021 actually amounts to a cost-effective policy to promote economic growth – the CBO estimates that every $1 of the Bush tax cuts has generated only a piddling 40 cents of additional economic activity.

To find such solid growth-oriented and fiscally responsible tax incentives that are targeted towards the most incentive-responsive sectors of the economy, you would have to look at the understated Obama tax cuts embedded in the 2009 stimulus package. Among the most cost-effective growth-oriented policies conducted in recent years have been the extension of the Existing Homes Tax Credit tucked into the American Recovery and Reinvestment Act of 2009. This unarguably pragmatic plank of the stimulus package combined Keynesian spending in the form of $5 billion of grants to low-income homeowners and it increased from 10% to 30% for the cost of energy-efficient insulation, windows, roofing, heating, ventilation and cooling systems and with a maximum tax deduction of $1,500. Because these particular tax incentives were tax credits completely conditional on very specific species of investments, the Existing Homes Tax Credit was specifically-targeted to stimulate economic activity.

The Existing Home Tax Credit was a primary reason why my family decided to splurge $13,120 renovating our house with a new set of windows. In all honesty the Obama tax credit wasn’t the only reason why we made this large investment – also, I was really, really cold. You see, our home and all of its original windows were built in 1972 – a year when the Vietnam War was a-raging, Don McLean’s “American Pie” was at the top of the Billboard charts, Richard Nixon obliterated George McGovern in his re-election campaign and five Cuban men were arrested in an elaborate plot to bug the office of the Democratic National Committee. 1972 was also mere months before the OPEC embargo on the United States, the mother of all oil crises and the classical era of energy conservation.

38 years later the seals on our windows had broken, the wood frames had warped and in many places the entire panel had fallen off its tracks. In my room the windows had degraded so badly that I literally could not close them. My room had always been drafty through high school and college; in the summer this was never really so bad, but it was always a bit uncomfortable when the outside temperature had fallen below 30 degrees Fahrenheit. Now that my body is still struggling to adjust from the sweltering Malian Sahel, I felt that I could now submit to my father a quite-valid request to crank up the thermostat.

“For such an admirer of Jimmy Carter, you of all people should put on a sweater…”

“I am wearing a sweater – and a polar fleece and a jacket and a scarf and a hat. And when I sit in my room I can see my own breath. With all due respect to President Carter, our house in Vista is situated in a different climatic zone than his peanut farm in Plains, Georgia…”

And we agreed that maybe there exist even more effective, cost-efficient methods of heat retention than polar fleece. My dad and I gave an ample examination of each and every one of our house’s 25 windows and came to the conclusion that they were all past their expiration date. Every window in our house was broken beyond repair; the seals were broken, the cavities between the panes were full of condensation. The worst culprits were the bay windows along the wall of our dining room. Our heat vents were blowing 30 percent of our hot air right out the window! And likewise, since heating and cooling constitutes roughly half of our home energy consumption, at least $50 of the $341 we spend a month on our electric bill was being completely and unnecessarily wasted – we were throwing at least $600 out the window every year!

The root of the problem was in the fact that the original windows built in this house were made with wood frames. Wood can be fine for flooring, paneling, trim and furniture, but it is in many ways an archaic building material for window frames because wood warps, it cracks, it eventually decays and rots no matter how much protective varnish you paint it with. Even in a climate spared of termites, wooden windows are not meant to last much longer than a single generation in America (33 years in my family). If people want to live in homes made of wood that’s fine, but so long as the United States’ official housing policy is to promote home ownership, then we Americans have to grasp that home ownership entails the responsibility of conducting necessary maintenance, repairs, and gradual modernization – and if we are going to own houses made out of organic materials like wood then we have to continue more regular upkeep than we would if our houses were made solely out of concrete, brick, plastic and steel.

And just as it makes only perfect sense for our every next car be a hybrid or an electric, it’s time to make sure that we not let this crisis go to waste either. If we have to replace our windows, we are going to replace them with the most effective, the most durable, the highest quality windows on the market to cut down on the amount of energy we consume for heating and cooling. Maybe our Ben Affleck-aged, 2,400-square-foot house is too outdated to ever be LEED-certified, but we can at least remodel and renovate it into something that is significantly more energy-efficient, something that requires less consumption of fossil fuels and reduces our overall carbon footprint.

My dad decided to go with the recommendation of one of his friends and hired Thermo-Tite Windows – a small business of a few dozen employees based out of Port Chester, New York which sells the highest-graded window available on the market to private homeowners. Apparently, we learned that when we are buying new windows every 38 years or so we should ensure the quality of the products we purchase by checking the window performance rating issued by the National Fenestration Rating Council.

Every window worth its weight in sand should be affixed with an NFRC rating label detailing the following:

U-factor - which measures how much energy material conducts.
solar heat gain coefficient - which measures how well a product blocks heat cause by the sunlight.
visible transmittance - which measures how much visible light comes through the glass.
condensation resistance –which measures the window’s ability to resist condensation on the interior surface.

The problem with our 38-year-old double-paned windows was that all that sat between those panes was gas composed of the natural ratio between nitrogen, oxygen, water vapor, carbon dioxide and argon found in Earth’s atmosphere.

“What is argon?” you might ask. Argon is a noble gas, element number 18. People usually do not give it much notice unless they are either engaged in the business of poultry asphyxiation, graphite production, titanium processing, filling up fluorescent light bulbs or windows. But people should give this noble gas the credit that it is due. Coming in third after only nitrogen (78.09%) and oxygen (20.95%), argon gas constitutes approximately 0.93% of the volume of Earth’s atmosphere; coming in fourth is the most prevalent greenhouse gas – carbon dioxide – which constitutes a mere 0.039%. Argon gas exhibits certain properties which allow us humans to utilize it in our manufacturing of windows in a way that reduces the prevalence of carbon dioxide and other greenhouse gases we pump into our atmosphere.

In vintage Genesis-with-Peter Gabriel-Era windows like the ones we had in our house, naturally-occurring argon gas usually constitutes only 0.93% of the insulation. That’s a terrible waste of that fraction of that millimeter of space between the two panes of glass that could be easily filled with a plurality of argon gas – which conducts heat less efficiently than nitrogen or oxygen. When the Mason family’s climate-controlled home interior is set to 68 degrees and the portion of the atmosphere directly adjacent to the windows is 34 degrees, the basic laws of thermodynamics entail that heat will gradually transfer from the portion of the atmosphere inside our house to the atmosphere outside of our house. Hence despite the fact that we were setting our thermostat and consuming enough energy to heat the house to 68 degrees it felt closer to 58 or even 48 right next to the windows.

Now in the 2010s the Thermo-Tite Window Company is mass-marketing double-paned windows with enhanced argon content of the slight cavity between the two panes. Gaseous argon allows for significantly less heat conduction than gaseous nitrogen or oxygen – so the greater the ratios of argon to nitrogen and argon to oxygen in a given gaseous mixture, the slower it will conduct heat. Compared to windows filled with naturally-composed dry air, this argon-enhanced double-pane window reduces heat conductivity by roughly 30 percent.

In a temperate climate like New York, most families consume approximately 864 kilowatt/hours of energy and spend $95 month air-conditioning their home from May through August. Since heat can also be conducted from the hot summer air outside through your windows to the air-conditioned interior, windows like my old Thermopanes with a high U-factor are wasting about 30 percent of that energy or $29 of their monthly electric bills on air-conditioning which also effectively is lost through the windows. And those are only the economic windfalls of the windows’ reduced heat conductivity!

Argon-filled Thermo-Tite Windows also receive such high performance ratings from the National Fenestration Rating Council because of their solar heat gain coefficient, their visible transmittance, and the windows’ condensation resistance. These factors are also beneficial to my household’s bottom line, because homes are also inadvertently heated by the sunlight which passes through the double-paned windows – so windows marked by higher solar heat gain coefficients and lower visible transmittance are heated by unwanted solar radiation during the months when families are cranking the AC. A New York household that uses a central air conditioner 8 hours a day could reduce the amount of heat coming into their house via solar radiation and reduce the amount of energy that their air conditioning system needs to bring the house to their designated temperature.

In layman’s terms, Thermo-Tite’s windows are framed with special insulating fiberglass which reduces the chance of condensation forming on the inside of the two panes. Thermo-Tite’s silver oxide-coated windows reduce the amount of solar radiation that passes through the glass panes and argon cavity – and this reduces the amount of energy consumed on cooling houses in the summer, which is much less than that lost by conduction but a considerable amount of energy nonetheless. With such slight technological improvements in manufacturing these windows from making the frames out of durable steel, plastic and fiberglass instead of wood, coating the glass with silver dioxide and filling the space between the two panes with concentrated argon gas, we can prevent so much wasted energy consumption on cooling by about 30 to 35 percent. In New York we consume a much greater percentage of our annual energy bill on heating than cooling in comparison to a household in Texas or Arizona, but over the months and years the costs add up nonetheless.

Altogether, New Yorkers typically spend 50 percent of their overall utility bills - roughly $4,000 - on heating and air-conditioning. So if there is any way that we can reduce the amount of energy we consume on heating and air-conditioning our homes – even by just a fraction, it can eventually adds up to hundreds if not thousands of dollars in savings every year. That means that if the average family in New York were to replace their outdated air-filled double-paned windows with energy-efficient argon-filled double-panes, they could save an average $600 each year on their electric bills. So by investing in more energy-efficient windows and reducing their consumption of fossil-fuel-generated electricity, that average family in New York would save themselves the equivalent of their much-heralded rebate from the 2001 Bush tax cuts every single year from now until they move out of their current home.

More money saved on utility bills is more money the pockets of consumers – in terms of economic behavior, savings on utility bills has supply-side effects on consumer spending no less than a check in the mail from the U.S. Treasury. If anything, it is more effective than the ostentatiously-marketed supply-side stimulus of the Bush tax cuts because people are less likely to notice the money saved and put it in the bank and more likely to go out and spend it on better-quality food at the supermarket, a new jacket at the department store, dinner and a movie with their girlfriend or a round of beers for all of their friends at the bar. Instead of spending money on oil imported from the Middle East, people who improve the energy-efficiency of their homes are now freed to spend that money on goods and services produced here in the United States.

A free market purist would argue that every consumer in America should simply be educated about the economics of energy consumption and the science of argon-filled windows and they should be able to decide upon such a clearly money-saving investment by their own reason and free will. Maybe my parents would have replaced the drafty windows in my room simply because it was so cold that I could see my breath at night. But what really prodded them to make this decision was the Obama administration’s $1,500 home weatherization tax credit.

After my dad and I inspected all of our broken, leaking 38-year-old windows, we did the math and calculated that to hire Thermo-Tite to replace every one of them would cost $13,120. But thanks to the tax credit, it would really only cost us $11,620 – still a significant sum, but a much more manageable one. Though we live in a relatively large 2,400-square-foot house, so we consume more energy on climatisation. by investing in more energy-efficient windows alone we should save approximately $50 month on our electric bills

Thanks to the Obama administration’s tax credit, we decided to pay Thermo-Tite Windows for $13,120 worth of argon-filled double-pane windows, insulated frames and installation. Our $13,120 went towards the windows themselves – which were manufactured in New Jersey, the Thermo-Tite company headquartered in Port Chester, New York, and the subcontracted carpenters who live throughout the Hudson Valley. And when the work was done we gave each one of the carpenters a $20 tip. The home weatherization tax credit spurred us to take $13,220 that would have otherwise laid fallow in the bank and to spend it on goods and services right here at home.

…And those window manufacturers in New Jersey and the management in Port Chester and the carpenters from Wappinger’s Falls are going to take the money they earned from us and spend it at the supermarket, at the movie theater, on Christmas gifts for their wives and their children. And that money in the pockets of working class households who need it the most is going to create more demand for more goods and more services and more jobs as it continues circulating and multiplying throughout the economy. From personal observation, I can tell you that the Existing Homes Tax Credit was the deciding factor in my family’s decision to put $13,220 into the economy – and all of this additional spending cost the U.S. Treasury only $1,500 in tax deductions. And the window-makers, carpenters and management are going to pay more income taxes, that extra money circulating and multiplying is going to generate sales taxes, thus the federal and state governments are going to reduce their deficits with more tax revenue.

The grant and tax incentive policies have received criticism over the past year as they have grossly underperformed the Obama administration benchmark of weatherizing 600,000 homes by March 2010. Vice President Biden came to in Manchester, New Hampshire to celebrate the weatherization of the 200,000th home on August 27th. At the current trajectory, the Energy Department will probably announce the 600,000th home improvement paid for with the Weatherization Assistance Program sometime in the sequel Recovery Summer 2011.

A March 2010 article by Garance Burke in the Boston Globe panned the weatherization measures of the Obama stimulus, noting that a year after the American Recovery and Reinvestment Act was signed by President Obama “the stimulus program has retrofitted 30,250 homes – about 5 percent of the overall goal – and fallen well short of the 87,000 jobs that the department planned.” Burke emphasized individual instances of inactivity as poster-children for the WAP grants’ ineffectuality;

“In Indiana, state-trained workers flubbed insulation jobs. In Alaska, Wyoming and the District of Columbia, the program has yet to produce a single job or retrofit one home. And in California, a state with nearly 37 million residents, the program at last count had created 84 jobs.”
Burke and other critics are correct to point out the inconvenient truth that this one of the Obama administration’s signature job creation policies has lagged in meeting its expectations on time. However, they are misguided in asserting that this lag in job creation has been due to any inherent fault in the structure of the Weatherization Assistance Program or the extension of the Existing Homes Tax Credit. One of the primary reasons why the home weatherization policies have yet to live up to the Obama administration’s projected job creation numbers has been because the Recovery Act was designed so that most of the stimulus funds would be spent by the individual states – and for one reason or another, the individual states have not administered the home weatherization programs that these grants are meant to fund.

The weatherization program has underperformed nationally because it has underperformed disproportionately in states like Alaska, Texas, Mississippi, Louisiana and South Carolina where the rock-ribbed Republican state governments are ideologically opposed to implementing President Obama’s stimulus policy. "We can't accept the bait," said Sarah Palin - then-Governor of Alaska. "It's a bribe - it's 'here, take these dollars - but you gotta grow your government.'" In addition to federal grants to pay for home weatherization, Governor Palin rejected energy efficiency grants, immunizations, air quality grants, emergency food assistance, homeless grants, senior meals, child care development grants, nutrition programs, homeless grants, arts, unemployment services, air quality, justice assistance grants and other programs allocated to Alaska. Surely if we are to caste blame for the disappointing track record of the home weatherization grants and tax credits in states like Alaska, Texas, Mississippi, Louisiana and South Carolina, we should be pointing our fingers at GOP Governors like Sarah Palin, Rick Perry, Haley Barbour, Bobby Jindal and Mark Sanford who have sacrificed the weatherization grants which would greatly benefit their constituents on the altars of national ticket ambitions.

Other states like California have fared so badly implementing their share of the Recovery Act’s stimulus funds because not because their Governors were more interested in political grandstanding but because their hands have been tied by sheer political gridlock. Though Governor Schwarzenegger had been an outspoken proponent of the Obama administration’s home weatherization policies in his state, California has been largely unable to implement stimulus projects because the state government is undergoing such a budget crisis has slashed public employees to such austere extremes – Governor Schwarzenegger has asked state employees to take voluntary “Furlough Fridays” – that the state can hardly cash their Weatherization Assistance Program grants let alone establish and conduct a brand new state housing program.

However, the opposite is true in Massachusetts – which is perfectly on schedule with spending its $122 million in WAP grants by the U.S. Energy Department’s March 2012 deadline. As of May, the Commonwealth had insulated 2,845 units of private housing, employing 42 new contractors and 220 new installers. The Massachusetts Department of Housing and Community Development has also awarded more than $10 million to 20 local housing authorities to weatherize the state’s 50,000 public housing units and replace their outdated, inefficient heating systems – with material procurement and installation happening as you read this blog. The primary reason why the Obama administration’s weatherization grants have been so consequential in Massachusetts while they have been faltering elsewhere is that under Governor Deval Patrick Massachusetts already had a established a functioning home weatherization program of its own albeit with a much smaller budget. When the Recovery Act’s WAP grants were allocated to the respective state governments, Massachusetts did not have to waste time with HR issues and was able to hit the ground running.

The Weatherization Assistance Program has yet to meet its job creation in the immediate short run perhaps because state-administered home weatherization programs are not as “shovel-ready” as federal highway spending or aid to the states to retain public school teachers, police officers. Nevertheless, as of Joe Biden’s August commemoration of the 200,000th weatherization of a private home with federal stimulus dollars, despite the delays and setbacks experienced in some of the largest states, this program had created approximately 13,000 jobs for plumbers, carpenters, electricians, welders and other assorted craftsmen. As states are picking up the pace, tens of thousands more jobs are projected to be generated by the modest $5 billion Weatherization Assistance Program.

An unfortunate matter for the Obama administration and other cheerleaders of Keynesian spending is that there exists hardly an iota of data available on the Existing Home Tax Credit for economists and public policy experts to parse. Homeowners were only able to begin making tax deductions on money they invested in energy-efficient retrofitting beginning as of Tax Day 2010 – so it would be fair to say that with the notable exception of professional policy analysts the vast majority of taxpayers did not feel this incentive until this year. Until we have conclusive numbers from the Departments of Treasury on how many people actually took this tax deduction, we can’t really know how much it costs because its expenditure is perfectly conditional on the degree to which people respond to this incentive, until we have employment statistics through December we can’t know how many jobs it created, and until we have statistics from the Department of Energy we can’t project how much they are going to reduce U.S. energy consumption and emission of greenhouse gases.

This whole matter of home weatherization is anything but a campaign of feel-good activism – it is a serious policy to spur economic growth and recovery. As far as tax cuts go, the Existing Homes Tax Credit is remarkably cost-efficient because there are no public monies being wasted on just throwing tax cuts at everyone with the hope that some of it might stick. The carrot of the tax credit is perfectly contingent on actual spending, so if you weatherize your house and actually put money into the economy you receive a tax credit, if you don’t you get nothing and the deficit is no worse as a result. No public monies are frittered on idle speculation, stagnant saving or wasteful consumption– the cost to the Treasury of this particular tax credit is directly offset by consumer investment which stimulates demand for domestically-produced goods and services and spurs employment for working class and middle class Americans. Since home heating and cooling costs are disproportionate strains on the pocketbooks of those working class and middle class families who can afford them the least, this tax credit is remarkably progressive – while at the same it remains egalitarian as higher-income families like my own can benefit from saving on energy bills all the same.

If my parents were to live in this house indefinitely then their investment in energy efficiency would pay for itself with savings on home heating and cooling bills after approximately 19 years; assuming that my parents still live in this house into their 70s then sometime around the year 2029 they would have an additional $4,800 every year to splurge on vacation, invest on the stock market, tuck away in their savings account, or do whatever their hearts desire with the windfall of real energy savings. Though by that time they Dan and Sue Mason will more likely have sold their present house and retired to Vermont or the Berkshires; they will nevertheless benefit because they will be able to sell this property for a higher price – not because of idle speculation on the real estate market but because they have invested in the real value of their home. Whichever way you look at it, the home weatherization tax credit will in the long run foster greater savings, investment and spending on goods and services produced in America, it could help revive the real value of property on the real estate market and should be a boon to the financial interests of homeowners, landlords and renters alike.

However, like the Bush tax cuts the extension of the Existing Homes Tax Credit is set to expire on December 31st of this year. Rich Neale, a sales representative for Thermo-Tite Windows says “We’ll still have jobs here and there, but a good portion of our business comes from customers are deciding to weatherize their windows solely because of the tax incentive. We’re afraid that at the end of the year our business is going to dry up.”

As Congress deliberates on which tax cuts to extend and which to let expire, the Existing Homes Tax Credit must not be overlooked. This directly targeted tax incentive stimulates economic activity and fosters job creation more cost-effectively than blanket reductions of the income tax, capital gains and dividends tax, and especially the inheritance tax. Moreover, these tax credits estimated to be valued in the hundreds of millions of dollars and their $5 billion public spending counterparts are relatively modest and affordable. Not all tax cuts serve as incentives for private sector growth the same way, some tax cuts are simply better fiscal policies than others, and there is no compelling economic argument that the gargantuan, ineffective, regressive boondoggles of the Bush tax cuts should be renewed but the modest, cost-effective, job-creating Existing Homes Tax Credit should be allowed to expire.

From my perspective, this is a no-brainer.

1 comment:

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