1. DEDICATING NEW REAL ESTATE TRANSFER TAXES FOR ENERGY EFFICIENCY A REVENUE OPTION FOR SCALING UP GREEN RETROFIT PROGRAMS T. William Lester Assistant Professor Department of City and Regional Planning University of North Carolina, Chapel Hill twlester@unc.edu twlester@unc.edu

2. Outline  Motivation  Design of an Energy Efficiency Transfer Tax (EETT)  Implementation and political feasibility  How to model net impacts?  Quantitative Exercise from NC  Findings from IMPLAN  Context and conclusion

3. Motivation  Huge potential of energy efficiency  Residential structures consume 22% of all energy (EIA, 2008)  Retrofitting existing structure essential to reduced energy use  What are residential retrofit measures? HVAC replacement Windows/Doors Appliances/Lighting Weatherization  Potential to save 40% on energy bills from retrofit (McKinsey, 2009)  Most policies offer “carrots”  Utility rebates  Federal Tax credits (e.g. $500 down from $1,500 under ARRA)  …..Failure to achieve critical mass  Historically high unemployment  9.1% overall (May 2011)  16.3% in construction sector (May 2011)

4. Background  We may need to start using more “sticks”  Real Estate Transfer Taxes (document stamps)  One of the oldest forms of taxation  Originally a federal tax, enacted in 1921  Repealed in 1965, but devolved  Currently 37 states have some level of transfer tax  Ranges from 0.1 (CO) to 2.2 percent (DC) of assessed value

5. Policy Design: An Energy Efficiency Transfer Tax  Level: $25 per $1,000 of assessed valuation, or 2.5%  Home buyers liable  Immediately rebated when a) audit and b) qualifying residential retrofit activities completed  Apply to existing homes built before 2000.  Energy Star homes exempt  Creates seller incentive  Pay or Play  Residual rebates apply to existing LIEE program funds  Pros: Progressive and proportional  Cons: May distort fragile housing market

6. Implementation and political feasibility  Option 1: Traditional Transfer Tax  Collected at time of purchase (i.e. on closing statement)  County recorder of deeds and state LIEE agency  Benefits: Follows existing policy infrastructure  Pitfalls: Lenders may balk at extra closing costs  Option 2: “Synthetic Tax”  Off statement  Administered through income tax code  2 years to complete the work, or pay the tax  More politically feasible

7. Will this policy create net new jobs? PsPs PdPd A. Revenue for EE (from consumer surplus) B. Revenue for EE (from producer surplus) QQ’Q’ δ =Deadweight loss of tax P t= Tax imposed

8. What to measure  Positive  Investment dollars for construction and energy audits  Energy savings  Negative  Behavioral response in housing market (i.e. price elasticity)  Reduced household spending  Falling demand for energy production

9. Calculating EE Investment Level: NC FactorValue A. Number of existing home sales in 2011 127,182 B. Share of existing homes sold built <200060.49% C. Average Price of Existing Homes in NC $203,071 D. Energy Efficiency Transfer Tax Rate2.5% E. Behavioral Response to EETT increase (price elasticity of -0.8) -2.0% F. Total estimated quantity sold subject to EETT 75,394 G. Estimated EETT Tax per home sold $5,077 H. Total Investment Level $382,757,075

10. Calculating Energy Savings FactorValue Average annual household expenditures on electricity and gas in NC $ 3,014 Energy Efficiency Transfer Tax Due on Typical Home $ 5,077 Less $500 Federal Tax Credit $ 4,577 Assumed Energy Efficiency Improvement Level Pay Back Period years 10%15.19 20%7.59 30%5.06 40% (McKinsey, 2009)3.80 50%3.04 Estimated Post-Project Annual Energy Costs/Household $1,808 Annual Savings Per Household $1,206 Aggregate Energy Savings $90,894,698

11. How is EETT paid for? Activities in Scenario 1: Financing AvailableActivities in Scenario 2: No Financing  Increase demand in construction and energy auditor sectors by $382M.  Decrease in household spending of $58M to account for net present value of interest payments only, paid over five years.  Decrease in commodity demand of $90.8M in electricity and natural gas.  Increase demand in construction and energy auditor sectors by $382M.  Increase in household spending of $90.8M due to energy savings  Decrease in household spending of $345M (net of Federal rebates).  Decrease in commodity demand of $90.8M in electricity and natural gas. Summary of IMPLAN Model Inputs

12. IMPLAN Economic Impact Results Scenario 1: Financed Impact TypeEmploymentLabor IncomeOutput Direct Effect3,629$138,361,004$291,917,086 Indirect Effect854$36,170,666$92,106,155 Induced Effect1,418$53,668,747$166,687,539 Total Effect5,900$228,200,417$550,710,780 Net Fiscal Imact = $ 56,837,225 Scenario 2: Cash up front Impact TypeEmploymentLabor IncomeOutput Direct Effect3,629$138,361,004$291,917,086 Indirect Effect854$36,170,666$92,106,155 Induced Effect-843($31,948,714)($98,744,653) Total Effect3,639$142,582,957$285,278,588 Net Fiscal Imact = $ 19,561,586

13. Results: Job Impacts 3,485 Construction 144 Auditors

14. Job Creation Figures in Context  Is 3,485 construction jobs and 5,900 jobs overall in North Carolina significant?  Compare to current number of unemployed workers  If enacted in 2011, the EETT would: Decrease overall unemployment rate from 9.7 to 9.5% Decrease construction industry unemployment by 1.2% Add $56 million to state and local coffers

15. Conclusion  Bottom line: EETT can have a net positive impact on job creation  Policy makers shouldn’t be afraid to use the “stick”  Messaging and communication is key  Tied to saving mortgage interest deduction  Responsibility of home ownership Precedents: Building codes for new construction Recycling mandates