ENERGY TAX CREDITS AND RESIDENTIAL CONSERVATION INVESTMENTS - EVIDENCE FROM PANEL-DATA

Using panel data on individual tax returns and variation in state tax policy, we measure the impact of government tax policies to encourage residential conservation investment on the probability of making these investments. Unlike previous work, we account for unobserved heterogeneity in tastes for energy-saving activities and its possible correlation with tax policy at the state level. We find that controlling for unobserved heterogeneity is very important. Based on our preferred point estimate of the tax price coefficient, a 10 percentage point change in the tax price for energy investment would lead to a 24 percent increase in the probability of making an investment.