The federal government provides tax credits for investments in energy sources that produce electricity without emitting carbon dioxide in the process. Two tax credits, the investment tax credit (ITC) and the production tax credit (PTC) directly support investment in wind and solar electrical energy. In the reference projections of the Congress Office Budget, these tax credits reduce federal income and increase federal expenses. In this report, CBO gives an overview of tax credits and explains how the agency assesses their budgetary and economic effects.
- In CBO’s basic projections in January 2025, ITC and PTC together increased deficits from 2026 to 2035 from around $ 300 billion. The cost of tax credits to invest in wind and solar electrical energy is uncertain because the underlying activity – the amount of investment itself – is uncertain.
- ITC and PTC provide an incentive to investment in the private sector. CBO believes that without these tax credits, investment in wind and solar electrical energy from 2024 to 2026 would be about a third less than what is planned with the credits in place. But because the behavior of investors is uncertain, including their response to variations in tax policy, the amount of investments attributable to tax credits could be higher or lower than that provided.
- The law on reconciliation of 2022 (public law 117-169) rendered the ITC and the PTC more generous for investments in projects that pay in force wages and employ apprentices, are located in certain geographic areas and use national material. The connection of tax credits to these other political objectives can encourage investment in projects whose costs per unit of capacity generation are higher than it would be, thus involving a compromise between supporting objectives and stimulating investment in wind and solar energy at the lowest possible cost.