Why killing home-energy tax credits would be bad for the economy

Amid rising energy costs nationwide, House Republicans voted to kill two long-standing federal tax credits that help Americans save hundreds of dollars on their utility bills each year. If approved by the Senate, the move could have serious economic consequences.

The Energy Efficient Home Improvement Credit cuts 30% of the cost of new insulation, doors, windows, water heaters, and heat pump heater/​ACs from households’ federal tax bills, with an annual maximum of $3,200. The Residential Clean Energy Credit gives households a federal tax break worth 30% of the price of installing solar panels, batteries, geothermal heat pumps, and other energy-producing and -saving systems. Its value is uncapped, but in 2023, the more than 1.2 million American families who claimed the credit each received an average of roughly $5,000.

U.S. lawmakers first passed the two tax credits in 2005 under the Energy Policy Act — signed by Republican President George W. Bush — and most recently expanded and extended them with the 2022 Inflation Reduction Act to last until 2032. Republicans are now aiming to eliminate the tax credits at the end of this year, part of a broader push to gut the landmark legislation.

Chucking the incentives could cause far-reaching damage. These tax breaks allow Americans to unlock thousands of dollars in annual savings on their energy bills, support nearly half a million jobs, and can help the grid meet growing energy demand for manufacturing and data centers, according to recent analyses by electrification nonprofit Rewiring America.

“The findings are so significant,” said Kevin Kircher, assistant professor of mechanical engineering at Purdue University who studies home energy systems and was not involved in Rewiring America’s analyses. ​“We’re talking about hundreds of thousands of American jobs. I think it’s hard to deny the importance of something like that.”

Using federal home-energy modeling tools, Rewiring America found that single-family households who use the energy-efficiency credit, also known as 25C, to install heat pumps and heat-pump water heaters and make weatherization upgrades save $990 on annual energy costs on average. The savings from those combined changes would be enough to offset the impact of the last four years of energy cost hikes, the organization found.

Add on solar panels with support from the Residential Clean Energy Credit, or 25D, and households can slash their annual energy bills by more than 70%, or $2,240 per year, Rewiring America says. 

“Politicians have talked about reducing energy prices,” said Kristin Eberhard, head of policy at Rewiring America. ​“But [killing the tax credits] is going to do exactly the opposite.”

To be sure, more efficient systems, which also boost comfort and indoor air quality, can cost more up front. But for millions of households, these upgrades more than pay for themselves over the appliance’s lifetime, according to Rewiring America. And when consumers are able to finance these systems, they can start to see net savings much sooner — or in some cases, immediately.

The tax credits also drive consumer spending that supports around 460,000 jobs, per the nonprofit. That figure includes direct jobs to install home-energy equipment, indirect jobs to manufacture and transport it, and induced local jobs spurred by worker spending, like at the restaurants where they stop for lunch.

The findings come as the Trump administration attacks popular energy-efficiency programs that have helped households save billions of dollars and reduced the use of planet-warming fossil fuels. The administration’s moves to dismantle programs like Energy Star have met industry opposition — as has Congress’ plan to eliminate the energy-efficiency tax credits.

More than 1,100 businesses across heating, ventilation, air conditioning, refrigeration, water heating, insulation, and home performance sectors signed a letter last month urging Congress to leave the 25C tax credit intact.

Members of Air Conditioning Contractors of America are also throwing their support behind the tax incentive, which is ​“simple, fuel neutral, and available nationwide” — in contrast to the Inflation Reduction Act’s more complex home energy rebates, Sean Robertson, the association’s vice president of membership, advocacy, and events, recently told Air Conditioning, Heating & Refrigeration News. The industry is encouraging contractors and their customers to reach out to their congressional representatives to defend the tax credits.

The sudden disappearance of such incentives can wreak havoc on an industry.

In 2017, geothermal heat pumps got cut from eligibility for the 25D tax credit. As a result, sales dropped by 50% that year, Ryan Dougherty, president of the nonprofit trade association Geothermal Exchange Organization, told the HVAC industry news outlet. ​“We cannot let that happen again.”

The tax credits also bolster the grid because in boosting efficiency, they reduce home energy use on the hottest and coldest days of the year. Not only is that good for reliability, but it also creates new economic opportunities by making room on the grid that could facilitate a rapid build-out of AI data centers and onshore manufacturing, according to Rewiring America.

Seven states would see annual peak demand fall by more than 1 gigawatt if all single-family, owner-occupied households were to install heat pumps and the weatherization upgrades incentivized by 25C, the nonprofit found. Texas alone could save nearly 7 gigawatts, equivalent to the amount needed to power more than 170 data centers.

House Republicans narrowly passed a tax and spending bill on Thursday morning that would terminate the tax credits; now it’s the Senate’s turn to pass its version of the bill. Some Republicans — including a potentially majority-busting four senators of the chamber’s 53 — have signed letters in support of safeguarding Inflation Reduction Act energy tax credits to at least some degree. But 21 House Republicans expressed similar support for the tax credits earlier this year and ended up voting for the larger budget bill anyway. Other Republicans have said cuts to the Biden-era law’s tax credits don’t go far enough.

Republican factions are also sparring over Medicaid cuts, the cap on a deduction that constituents can take for state and local taxes, and whether to supersize the deficit — and sparing little attention for the consequences of scrapping the two home-energy tax credits.

An update was made on May 22, 2025: This story has been updated to reflect that House Republicans’ budget legislation passed the House early Thursday morning.