BILL ANALYSIS AND FISCAL IMPACT REPORT	Page 1 of  2

DATE: February 23, 2001	Submitted by: TAXATION AND REVENUE DEPT.
	T. GLENN ELLINGTON, SECRETARY
BILL NUMBER: SB - 761

SPONSOR: Senators Cravens and Cisneros

BILL SHORT TITLE: Gross Receipts Tax Deduction for Receipts from Selling Appliances that Exceed Energy Star Ratings

DESCRIPTION: For a four-year trial period, receipts from selling dishwashers, clothes washing machines and  standard-size refrigerators that exceed energy star efficiency ratings requirements may be deducted from gross receipts. Similarly, receipts from selling high efficiency fuel cells that generate electricity and heat, solar hot water heating systems, natural gas water heaters with “energy factor” of .65 and photovoltaic systems may be similarly deducted. 

EFFECTIVE DATE: not stated – 90 days after adjournment (June 17).

FISCAL IMPACT (Thousands of dollars):  		Note: Parenthesis ( ) indicate a revenue loss:

		Recurring or		
Estimated Impact on Revenues	Nonrecurring	Funds 	
	 FY 2002 	Full Year	     Impact     t     	             Affected          .             	
	(270)	(300)	Recurring	General Fund	
	(180)	(200)	Recurring	Local Governments	

The most active area for this credit will be clothes washers, followed by photovoltaics for off-the-grid new homes. There are approximately 250 homes in this category. Typical system prices run $5 to $10 per installed watt. This price includes batteries and an inverter. A typical home can be run very frugally with a 1,000 watt system and comfortably with a 5KW system. Assume the average is 2KW and $8 per watt. This is an average system price of $16,000 and a tax cost of less than $100K. Modern high efficiency front-loading clothes washers save energy and water. Typical savings over conventional appliances are in the range of $50 to $100 per year. Since a typical price for a high-efficiency washer is up to 2 ½ time that of a conventional top-loader, the payoff periods are on the order of eight to ten years. This is primarily a luxury buy. However, these high-efficiency clothes washers and companion clothes dryers – ASKO of Sweden is particularly popular – are very popular and are currently installed in virtually all high-end new homes, particularly in Santa Fe and Taos. The market is apparently in excess of 3,000 appliances a year at $800 to $1,200 per unit. This places the tax cost in the range of $200K. There will be little activity in high efficiency hot water heaters, primarily because of supply. Some research indicates that the natural gas hot water heater industry considers an “energy factor” of .58 “high efficiency”. Other research indicates that DOE requires energy factors of .62 for any new water heater. However, a perusal of the October 2000 list of appliances available by the Gas Appliance Manufacturers Association (G.A.M.A.) indicated only two heaters – both manufactured by Bradford White Corporation -- had an energy factor of .65. Only one of these models burns natural gas. High-end new homes are using combination boiler/hot water heaters which do not qualify for the deduction. Assume that all the other technologies will generate a tax cost of $200K.

ADMINISTRATIVE IMPACT: the Department will be virtually unable to administer the more arcane specifications of this bill without significant input and cooperation from specialists. Auditors will be in the unenviable position of having to make scientific, and not financial, judgements.

TECHNICAL ISSUES:
1.	The Department requests a July 1, 2001 effective date so that taxpayers may be informed in an orderly fashion of this law.

2.	“energy factor” for the purpose of natural gas water heaters needs to be defined. For boilers and furnaces, the applicable statistic is known as “AFUE” or “annual fuel utilization efficiency”. Apparently the term “energy factor” is a definition developed by the Gas Appliance Manufacturers Association (G.A.M.A.). However, DOE apparently uses energy factor in its calculation of annual energy consumption, which it then requires to be put on labels available to consumers at the time of sale.

3.	It is difficult to see how “natural gas” hot water heaters should be tax advantaged and a propane heater with the same .65 e.f. does not qualify for the deduction.

4.	It is also difficult to see how combination boilers/hot water heaters with AFUE well in excess of .65 should not be tax advantaged.

5.	High-efficiency wind turbine systems are also excluded.

OTHER IMPACTS AND ISSUES:
1.	In 1992, the Department of Energy set new minimum efficiency standards for home furnaces and boilers, requiring every new unit manufactured after January, 1992, to turn at least 78% of its fuel into energy. Innovations in natural gas furnaces and boilers have far exceeded these standards with AFUE (Annual Fuel Utilization Efficiency) ratings of up to 96%. AFUE is like miles per gallon for a car-the higher the number, the higher the efficiency. Curiously, these home furnaces and boilers are not eligible for this deduction.

2.	In July 1990, DOE, apparently using the GAMA energy factor ratings, prescribed a minimum energy factor for gas hot water heaters of .62. This makes the .65 rating included in this bill’s specifications suspect. Neither natural gas or propane water heaters are currently rated under the energy star efficiency rating system. 

3.	DOE and EPA jointly maintain a web site: www.energystar.gov that has, among a wealth of other information and features, a calculator to compare annual cost savings of particular brand and model of energy star-rated appliance to a conventional appliance.

4.	The state’s experience with using taxes to provide incentives for energy saving purchases and behaviors is very poor. A solar equipment credit, which included some credit for passive solar architecture, was badly misused in the early and mid-80’s. Wholesale fraud was detected and prosecuted. Virtually none of the systems installed in that era survive to date.

5.	This credit will possibly reward two classes of people (1) very high income consumers for whom energy conservation is a fad and hobby --  or more – the right thing to do. The price elasticity for these products with this group is such that the discount of 6% or so will modify an insignificant number of decisions. This is a classic example of “buying the base” with virtually no impact at the margin; (2) moderate income taxpayers who have determined through elaborate planning that they can achieve the best compromise between independence and cost by living off the grid. These are truly pioneers. The tax deduction would be welcome to these taxpayers, but, again, the decision to live off the grid and save on purchased energy is a life-style choice that will not be significantly affected by a 6% tax deduction. One is left with the uncomfortable conclusion that any tax deduction will not end up in the pockets of consumers, but in the pockets of retailers of high-efficiency technology who have the ability to adjust prices according to demand and net cost.