HVAC Residential Market / Furnaces / Air Conditioners

No More Federal Tax Credit: Let’s Save the Tears and Move On

March 26, 2012
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For a while there, we had it good. The HVAC industry enjoyed a $1,500 federal tax credit during 2009 and 2010. Many homeowners were aware of this incentive, and higher-efficiency equipment almost sold itself. It seemed silly to purchase standard equipment when the credit paid for the upgrade to high efficiency.

In 2011, this beefy credit was reduced to $300 for compressor-bearing equipment and $200 for furnaces — a nice bonus, but not enough to make an efficiency upgrade a no-brainer. And, as of Dec. 31, 2011, the tax credit expired completely, leaving our industry with no federal incentive on traditional systems (geothermal systems have a tax credit until 2016).

We’ve heard many industry experts and contractors exclaim that homeowners will now revert to standard efficiency. Before we throw the high-efficiency equipment out with the bath water, let’s take a close look at how the tax credits affected sales and how they can be replaced in 2012.

Impact on the Industry

Take a look at AHRI shipment data, and you’ll see that the federal tax credit created a significant mix shift to higher-efficiency equipment in 2009 and 2010. But what about 2011? Many in the industry speculated that the reduction of the credit would send the mix back to 2008 levels. However, this is not what happened. (See Figure 1.)

The industry did experience a mix shift in 2011, but it was not nearly as dramatic as many predicted. In fact, 16 and 17+ SEER equipment did fairly well in 2011 when compared to 2010 — it was 15 SEER that saw the most significant reduction. There were 418,632 units shipped in 2010 that were 16 SEER, as compared to 397,874 units shipped in 2011 — this represents a mere 4.9 percent decline.

On the other hand, there were 484,439 units of 15 SEER equipment shipped in 2010 as compared to 347,301 in 2011, which is a 28.3 percent shift in the wrong direction. But even with that reduction, 2011 15 SEER equipment still finished 20 percent above what was sold in 2008.

So why didn’t we see the predicted shift to pre-tax credit mixes?

More Ways to Sell High Efficiency

In this tight economy, many consumers have become more aware of their utility bills and what it costs to maintain a comfortable home environment. As shown in Figure 2, which highlights data from the EPA website, heating and cooling equipment is by far the largest energy gobbler in the home, representing 46 percent of home energy costs.

This increased awareness works to the contractor’s benefit when upselling to higher efficiency systems. Presenting a monthly energy savings and a short payback period are often the keys to selling a 15 SEER versus a 13 SEER unit.

It’s no secret that upselling to higher efficiency equipment is more profitable for the industry than selling at the federal minimum. Many smart contractors have realized this, as evidenced by the 2011 trends shown in Figure 1. So how do we keep the trends moving in the right direction?

One answer is to focus on selling the features of higher-end equipment such as energy savings, lower sound levels, and better humidity control. Homeowners are looking for the best value for their money, and oftentimes a system that can save energy and create a more enjoyable home is the best value even if it costs more.

But wait, there’s more. Don’t overlook the concept that can be as effective and as financially beneficial as the federal tax credit: utility rebates. There are local utility rebates available that are more lucrative than the 2009-2010 tax credit.

And let’s not forget, the tax credit was only available to consumers who had a tax liability. The Tax Foundation, a nonpartisan tax research group based in Washington, D.C., estimated that 43.4 million tax returns had no tax liability in 2006. These 43.4 million tax returns represented approximately 91 million individuals who paid zero federal income tax. And in 2009, the Tax Foundation estimated that the number of tax returns paying zero federal tax grew to 47 million, or 96 million individuals. Furthermore, these numbers don’t include Americans who had tax liabilities less than $1500 and could not have used the full credit. In essence, the government excluded a large portion of the U.S. population by structuring the program as a non-refundable tax credit.

A local utility rebate, on the other hand, is available to all customers. Many homeowners may not know everything that they could qualify for, which is why it’s the contractor’s job to present the utility rebates when presenting the benefits of the system.

A great tool for finding those rebates is www.dsireusa.org. DSIRE stands for Database of State Incentives for Renewables & Efficiency, and this website lets you search for utility rebates by area. Just be aware that smaller utility companies in more rural areas may not be represented in the database.

With a quick search of the DSIRE database, you will learn that you’re in luck if you live in Florida. Florida Power and Light (FPL) is offering an $880 rebate for a customer replacing a 3-ton 10 SEER unit with an 18 SEER. When a 5-ton 10 SEER unit is replaced with a 20 SEER, FPL is offering a $1,930 rebate — not too shabby.

In California, Pacific Gas & Electric (PG&E) is offering rebates between $150 and $300 for high-efficiency furnaces. A 95 percent furnace with a variable speed blower is worth $200 under the PG&E program — equal to the 2011 tax credit and available to every consumer who buys electricity and natural gas from PG&E.

Many equipment manufacturers offer seasonal rebate programs for higher efficiency equipment. At Nordyne, we offer a $1,300 rebate on our iQ Drive® inverter systems in the spring and the fall. Combine that with a utility rebate, and you have a powerful selling proposition to the consumer. In many cases, this combination will exceed what the tax credit used to provide.

Will the Tax Credit Return?

As closely as we pay attention to Washington, predicting the activities of the federal government are problematic at best. Current trends are centered on budget cuts and deficit reductions, but there are more than 60 expired tax provisions that need extensions.

At Nordyne, we believe it’s possible that a 25C extension could get combined with some of this legislation, but we’re planning on not having the tax credit in 2012. If one gets retroactively reinstated, it will just be an added bonus to an industry that is learning to sell high-efficiency equipment without it very well.

Publication date: 03/26/2012

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