EVALUATING CONSERVATION PROGRAMS
Wicker, Alan W. (1%9), "Attitudes vs. Actions: The Relation-
ship of Verbd and Overt Behavioral Responses to Attitude
Objects," Journal of Social tssues, 25, 41-78.
Winett, Richard A. (1980), "An Emerging Approach to Energy
Conservation," in Behavioral Community Psychology, ed.
David Glenwick and Lenny Jason, New York: Praeger Pub-
lishers.
, and Neale, Mike S. (1979), "Psychological Framework
for Energy Conservation in Buildings: Strategies, Outcomes,
Directions," Energy and Buildings. 2, 101-16.
, Kagel, John, Battalio, Ray C , and Winkler, Robin A.
Tax Credits as a Means of Influencing
Consumer Behavior
H ome energy use, which accounts for 10 percent of the
national total, appears to be a particularly fruitful area
for conservation. Addition of insulation in homes without
adequate insulation can reduce household energy consump-
tion by 30 to 40 percent (Congressional Budget Office
1977, pp. 82-3). The Residential Energy Conservation Tax
Credit of 1978 was passed as a means of achieving the goal
of insulating 90 percent of the homes needing insulation
over the life of the credit. The credit for "energy conser-
vation" is 15 percent of the first $2,000 of qualified ex-
penditures, or maximum credit of $300 on a cumulative
basis (Intemal Revenue Code Sec. 44C). Qualified expen-
ditures include insulation, storm or thermal windows or
doors, replacement burners, fumace ignition systems, clock
themiostat, caulking or weather-stripping of exterior doors
or walls, and other similar energy-conserving devices.
Tax credits are becoming increasingly popular as public
policy tools, because they give visible proof that Congress
is taking positive action (Sommerfield, Anderson, and
Brock 1980, Chap. 7, p. I). Yet, although billions of dol-
lars in tax credits are foregone by the govemment each
year, virtually nothing is known of the real impact of a tax
credit on consumer decisions.
Robert E. Pitts is Assistant Professor of Marketing, and James L.
Winenbach is Peat. Marwick, Mitchell Research Associate Professor of
Accountancy, both at the College of Business Administration, University
of Notre Dame, Notre Dame, IN 46556. The authors wish to express their
appreciation to the Peat, Marwick, Mitchell Foundation for funding this
research project.
335
(1978), "The Effects of Rebates, Feedback, and Information
on Electricity Conservation," Journal of Applied Behavior
Analysis, 63, 73-80.
, Kaiser, Stephen, and Haberkom, Gregory (1977), "The
Effects of Monetary Rebates and Feedback on Electricity
Conservation," Journal of Environmental Systems, 6,
329-41.
, Neale, Mike S., and Grier, H. C. (1979), "The Effects
of Self-Monitoring and Feedback on Residential Electricity
Consumption," Journal of Applied Behavior Analysis, 12,
173-84.
ROBERT E. PITTS
JAMES L. WITTENBACH*
The purpose of this article is to examine the merits of tax
credits as a means of stimulating behavior, and to repon
the results of a study measuring the impact of the energy
tax credit on the decision of consumers to insulate their
homes.
PROS AND CONS OF TAX CREDITS
Tax credits promote individual rather than govemmental
choice of how money will be spent to accomplish public
policy objectives (Weidenbaum 1974). As opposed to most
govemment subsidies, a tax credit is given directly to the
citizen after the desired behavior is accomplished. Tax
credits may serve as incentives in areas where direct ex-
penditure by the govemment would be difficult (Hyatt
1977). Tax credits are perceived as a "costless form of
subsidy" because the govemment merely refrains from col-
lecting taxes from eligible individuals rather than redistri-
buting funds.
But, tax credits are not without problems. One congres-
sional study contends that the Energy Conservation credit
would "merely add to the impetus" of individuals buying
insulation as a result of fuel cost increases. The study stated
that " . . . a large share of any tax credits would be a
windfall payment to people who have already decided to
add insulation" (Congressional Budget Office 1977, p. 85).
Increasing energy costs appear to have motivated many
consumers to purchase insulation products. Thus, in 1975,
9.1 million or 22 percent of the occupied single-family
detached houses added some form of insulation.
C JOURNAL OF CONSUMER RESEARCH Vol. 8 t)eeeinber 1981
336
Critics contend that many credits are subsidies for the
middle class (Surrey 1973). It may be argued that subsidies
should not be given to people sufficiently motivated by
environmental factors to engage in the desired behaviors
(Hyatt 1977). The credit appears to do little to help those
consumers least able to afford insulation investment. More
than 50 percent of the homes of the poor do not have in-
sulation compared to only five percent of the homes of more
well-to-do citizens (Hyatt 1977). Yet, credits are available
only to taxpayers whose tax liabilities are sufficient to cover
the credit claim. Further, the after-the-fact nature of the
credit requires that recipients bear the entire initial cost.
This represents an almost intolerable situation for lower-
income families who spend most, if not all, of their take-
home pay on consumption items. (Hyatt 1977, p. 314).
TAX CREDITS AND CONSUMER
BEHAVIOR
The homeowner should be willing to invest in additional
energy conservation to the point where the additional cost
of the investment is matched by the dollar saving from that
investment." The impact of a tax credit on behavior makes
the desired buyer behavior more attractive by offering an
investment subsidy in the form of a price reduction. How-
ever, several things must happen before a tax credit can
stimulate the desired behavior.
First, the consumer must know that a tax credit exists.
The subsidy provided by a tax credit is unlike normal price
reductions that are heavily promoted. Although credits may
be announced when a tax bill is passed by Congress, pub-
licity is limited.
Second, the consumer must perceive the credit to be a
means of price reduction. A tax credit is more complex
than a cash discount. Thus, even if the customer knows of
the credit, he may not understand it or the amount of the
subsidy. The more knowledgeable taxpayer may realize that
the value of the tax credit is a function of his or her yearly
tax bill. The average insulation expenditure is so small that
the actual subsidy to the taxpayer would generally be quite
small. Sixty-one percent of 1975 insulation expenditures
were under SIOO; 14 percent between $100 and S200, and
only 8.4 percent spent more than S400. Thus, relatively
few taxpayers could be expected to receive large credits.
AN EMPIRICAL EVALUATION
A study of the impact of The Residential Energy Con-
servation Tax Credit was conducted in the spring of 1979
(approximately 24 months after the tax credit became ef-
fective) in a middle-sized midwestem "snowbelt" city. A
telephone survey was used to collect data for the study.
Lists of families making insulation and/or other energy con-
senation purchases since passage of the Energy Tax Act
'From a two-page letter by James C. Heinhold, dated August 24, 1979.
responding to a request for information from the authors to Senator Russell
B. Lxing, Chairman of the Committee on Finance.
THE JOURNAL OF CONSUMER RESEARCH
on November 9, 1978 were procured from the major "rep-
utable" insulation firms in the city. Only one local firm,
which had a history of numerous consumer complaints,
refused to cooperate.
Two hundred purchasers of residential energy conserving
products were contacted by mail with a prestudy notifica-
tion letter. The purpose of the study was described in the
letter, and recipients were requested to cooperate with in-
terviewers who would be contacting them by phone. The
following week, study participants were interviewed on the
telephone by a professional inter%iewing service.
Respondents were asked a series of questions conceming
the importance of the energy tax credit in their decision to
purchase insulation, their knowledge of the credit, and
where they got this information. Detailed information con-
ceming the value of the credit, the cost of the insulation,
value of their home, income, education, and occupation
was also collected.
RESULTS
Of the 2(X) individuals contacted by phone, 146 agreed
to provide all the infonnation requesteda response rate
of 73 percent. Data collected on family income, education
of the head of the household, and residence value indicated
that insulation purchasers were generally "upscale." One-
half of the respondents reported post-high-school education.
Mean family income was reported at S23,5OO, with a me-
dian income of S 19,500. Mean reported residence valuation
was approximately 547,000, with a median of approxi-
mately S40,000.
Attic insulation was by far the principal energy conser\'-
ing product/ser\'ice purchased by the respondents, with 86
percent making this purchase. Thirty-three percent of the
respondents purchased wall insulation, and 13 percent pur-
chased floor insulation. Only four percent of the respon-
dents purchased any of the mechanical devices eligible for
the credit. The mean amount spent by respondents on en-
ergy conser\'ing products was S428, with a range from $50
to $2.(XX), and a median of approximately $315.
Two basic groups of individuals were identified in the
study. The first consisted of those taxpayers who made
eligible energy conser\'ation purchases after November 8.
1978 and prior to January 1, i979. Any credit claimed was
reported on their 1978 tax return (112 respondents, or 73
percent). The second group consisted of taxpayers who
made purchases after December 31, 1978. They would not
be claiming available credits until after computation of their
1979 tax bill (34 respondents, or 27 percent). Respondents
were contacted several weeks after the April 15, 1979 tax
deadline for the 1978 filings.
The average credit taken in 1978 was $66 for the 112
respondents eligible for the credit in 1978. However, 20
respondents, or 18 percent of those taxpayers making eli-
gible 1978 purchases, claimed no credit on their tax retums.
Even those citizens who had claimed the credit did not
understand it fully. Several respondents reported simply
taking a credit equal to the amount of the purchase, while
TAX CREDITS 337

TABLE 1 TABLE 2
RATED IMPORTANCE OF TAX CREDIT COMPARED TO TAX RESPONSES BY CATEGORY
CREDIT TAKEN
Credit No credit
Did not or taken in taken in Significance
could not Intend to Category 1978 1978 levei
Took credit take credit take credit
Importance for 1978* in 1978' for 1979 Number Percent retired 12% 35% .01
Percent white coliar 61% 35% .04
Important 52% 5% 38% 62 Age of residence (years) 33.8 27.2 N.S.
Unimportant 48% 95% 62% 84 Value of residence $51,440 $42,670 N.S.
Amount of insuiation $432 $399 N.S.
Total 100% 100% 100% purchase
Base 92 20 34 146 Percentage with coiiege 57% 25% .0
education
*Purchased between November 8.1978 and January 1.1979.
Age of head of household 49.0 52.7 N.S.
'1'urchased alter Oecember 31,1978.
NOTE: Chi square - ^S.3.p < 0.0005.
Income $25,700 $22,500 N.S.
Correct response to credit's 38% 20% N.S.
effect on tax bili
several others ignored the $300 maximum. For those tax-
payers taking any credit, the mean credit was $84. Mean credit $84 $0
Base 92 20
Forty-two percent of the respondents reported that the
credit was important in their decision to purchase insulation NOTE: N.S. - not signiicam.
products. However, as shown in Table 1, taxpayers who
did not or could not take the credit against their tax bill, decision had been made. The amount of credit received and
generally indicated the credit to be of little importance. the amount spent were the same. Education was the only
Further, 62 percent of those respondents who purchased demographic variable that distinguished respondents leam-
insulation products in 1979 and had yet to compute their ing of the credit before versus after purchase. College-ed-
1979 tax bill, considered the credit unimportant. ucated respondents were more likely (p < 0.05) to have
Energy costs were ranked as the most important factor known about the credit prior to purchase.
in the purchase decision by 95 percent of the respondents. The average expenditure for respondents with incomes
Only five percent ranked concem over the national energy equal to or less than $10,000 did not vary significantly from
crisis as most important. Desire to take advantage of the the $474 reported by respondents with incomes above
tax credit received no "most important" ratings, and only $10,000, but the price reduction realized did var>' signifi-
14 percent of the "second most important" ratings. When cantly between the two groups (p < 0.0001). Families with
asked if they "would have made the purchase if the credit incomes less than $10,0(K) received credits that averaged
had not been offered," not one of the 146 respondents said only $16, with a maximum credit of just $45. The mean
no. Thus, while the credit might be perceived as important credit of those over $10,000 was $78; a number of respon-
by some respondents, it does not appear to be the deciding dents used the allowable maximum of $300. The two in-
factor in the purchase decision. come groups did not differ in their knowledge of the credit
Fifty-three percent of the respondents learned of the before purchase.
credit before considering purchase, and another eight per- Thirty percent of those claiming no credit (six respon-
cent reported that they heard of it at the time of purchase. dents, or five percent of the total) indicated that they could
Thirty-nine percent, however, reported that they learned of not take the credit, as they had no tax due. Half of those
the credit from various sources after purchase. Sixty-five who claimed no credit provided responses that reflected a
percent of the respondents who knew of the credit prior to lack of knowledge of the existence of the credit. Further-
the study leamed of it from television, radio, or newspaper. more, three respondents, or 15 percent of those who
Eleven percent heard of it from a friend, and another 12 claimed no credit, although one was available, filed the
percent leamed of the credit during tax computation. Sur- short form (1040A).
prisingly, only seven percent of the respondents leamed of
Comparisons were made between the demographic char-
the credit from salesmen or sales aids.
acteristics of those eligible respondents taking some credit
Only thirty-seven percent of the study respondents could and those claiming zero credit (Table 2). As critics con-
correctly respond that a tax credit is deducted from total tended, a greater proportion of retired individuals received
taxes; 22 percent responded incorrectly that a tax credit is no credit. Those receiving the credit tended to be college
subtracted from total income, and 41 percent "didn't educated and to hold white-collar jobs.
know." Further, those who had already computed the credit
for 1978 taxes were no more likely to respond correctly
(38 percent correct) than those who could not take advan-
DISCUSSION
tage of the credit until 1979 (35 percent correct). These findings suggest that The Residential Energy Tax
Those informed of the credit before purchase were com- Credit has had minimal effect on major insulation purchase
pared with those who heard of the credit after the purchase decisions. Not one respondent considered the tax credit so
338
important that the purchase would not have been made
widiout it. However, it should be emphasized that the study
population is not representative of all insulation purchasers;
only those making major purchases through full-service
channels were surveyed. This group, however, does have
the most to gain in absolute dollars through the tax credit.
The study group would, thus, be more likely to know of
the credit, and more likely to be infiuenced by the subsidy
than individuals making small dollar-value purchases.
The overall impact of any subsidy is limited by consumer
knowledge. In the case of the Residential Energy Tax Credit
such knowledge appears very limited. Despite an average
expenditure of $428, only 61 percent of the respondents
had acquired any information about the credit prior to the
final purchase decision. Yet, by the very nature of the pur-
chase and by the group from which the sample was drawn,
higher levels of knowledge than that of the general public
might be expected. Thus, the credit would appear to be a
windfall to at least the 39 percent of the respondents who
leamed of the credit only after purchase.
That the amount spent on insulation was not significantly
different, whether the insulation purchasers had knowledge
of the credit or not, is particularly important. The amount
of consumer purchase is dictated by need and ability to
make the necessary purchase. As the credit provides no
means of facilitating a purchase, it does not appear to be
a salient factor in the purchase decision.
This study supports the contention that tax credits do not
benefit lower-income families as much as they benefit
THE JOURNAL OF CONSUMER RESEARCH
higher-income families. As lower-income families spend
virtually all their disposable income on consumption items,
they are unable to save the necessary funds needed to ret-
rofit their homes. Furthermore, these same families cannot
benefit from the credit because they have little or no tax
liability.
[Received February 1980. Revised June 1980.]
REFERENCES
Hyatt, Sherry V. (1977), "Thermal Efficiency and Taxes: The
Residential Energy Conservation Tax Credit," Harvard
Jourrwl on Legislation, 14, 281-326.
Internal Revenue Code of 1954, Januar>' 1. 1979 edn., Englewood
Cliffs, NJ: Prentice-Hall, Inc.
Congressional Budget Office (1977), President Carter's Energy
Proposals: A Perspective, 2nd edn. The Congress of the
United States, June.
Sommerfield. Ray M., Anderson, Hershel M., and Brock. Horace
R. (1980), An Introduction to Taxation. New York: Harcoun
Brace & Jovanovich. Inc.
Surrey, Stanley S. (1973), Pathways to Tax Reform: The Concept
of Tax Expenditures, Cambridge. MA: Harvard University
Press.
Weidenbaum, Murray L. (1974). "TTie Advantages of Credits on
the Personal Income Tax," George Washington Law Review,
42, 516-25.