There is growing bipartisan interest in tax reform. Our tax code is widely criticized as being too complicated, and it has been more than 20 years since the tax code has had a major overhaul. Many proposals call for fewer tax brackets and eliminating many current tax breaks, creating a simpler code with lower tax rates. In considering tax reform, it is important to consider how the current code, and potential changes to the code, provide incentives or disincentives for desirable actions. Ideally the code should encourage societally useful actions; at a minimum it should not discourage such actions.
Among the actions we would like to encourage, and not discourage, are cost-effective energy efficiency investments. There is an enormous amount of potential for individuals and businesses to reduce energy consumption through currently available energy efficiency measures, as well as innovative technologies in the future. Realization of these energy savings will help make American businesses more productive; improve their competitive position relative to foreign firms; and reduce the security, cost, and environmental impacts of high energy use.
Both individual and business taxes are slated for reform. In this paper we focus on business taxes and in particular on how businesses account for energy costs when computing their taxes.
