Tax Breaks for Geothermal Heating System Installation

Ron Huber with Harvey’s Plumbing and Heating in Bozeman, explains how a geothermal heating system pump works on a display at the shop’s showroom on Wednesday.

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The wealthy homeowners of Big Sky's Yellowstone Club still must weigh the energy costs of heating through Montana's long, cold winters.

Throughout the state, rural locales like Big Sky are sometimes missing a natural gas supply line that feeds the traditional furnace. The workaround is an on-site propane tank with regular deliveries.

Another option is an expensive, but highly efficient geothermal heat pump using a relatively small amount of electricity to capture and convey the year-round heat stored in the earth.

According to a local heating and plumbing firm, a ground source heating system large enough to heat a typical Yellowstone Club home can cost between $100,000 and $115,000.

Economically speaking, the systems pay for themselves over time, reducing the energy bill by $8,000 per year, and for some, offer a moral alternative to fossil fuel consumption.

The federal government helps out with the cost, offering a 30 percent income tax break. And so does Montana. Since 1991, the state has had its own $1,500 geothermal income tax break.

According to a Chronicle analysis of state figures, the little known policy amounts to a tax break for the wealthy, costing the state's coffers over a quarter million dollars per year.

In 2014, Montana's Department of Revenue awarded 196 applicants a geothermal income tax credit — 127 from people in the wealthiest 20 percent of society. And that's been the trend for at least the last five years for which the Department of Revenue provided numbers.

"The state's geothermal tax credit contains flaws that are found in many renewable tax credit programs. The benefits are concentrated in a small number of households and those households tend to have a much higher income than the average Montana family," said Brent Mead, director of the conservative Montana Policy Institute in Helena.

"A homeowner looking at one of these systems is probably making the decision based on energy efficiency and aesthetics; not installation costs," he argued.

"The tax credit ends up subsidizing activity that would have occurred regardless."

Montana doesn't regularly review its tax breaks

Analysis of a tax credit has become an art form in some states. Amidst budget problems, Oregon lawmakers voted in 2009 to sunset all of their tax credits on a six-year rolling basis. They've been busy reviewing and reauthorizing them since.

In most states — including Connecticut, Florida, Indiana, Maryland, Mississippi and Rhode Island — all incentives are reviewed at least once every three to five years, according to a 2015 report by the Pew Charitable Trust.

And between 2012 and 2014, 10 states and the District of Columbia created regular evaluation of tax incentives or improvements on their current processes, Pew found.

Montana is not among them.

According to the Department of Revenue, Montana has 54 individual income tax breaks, 27 corporate income tax expenditures, five oil and gas production credits, and three property tax breaks. Together, they subtracted $271 million from state revenue in 2014.

Many were enacted decades ago, yet Montana lawmakers, meeting sporadically between four-month-long sessions held every other year, rarely engage in substantive review.

During the 2015 legislative session, Republican state Rep. Roy Hollandsworth sponsored a bill that would have mimicked Oregon's process. It created sunset dates for 24 personal or corporate income tax credits and charged the Revenue and Transportation Committee with reviewing and recommending their reauthorization.

Democratic Gov. Steve Bullock vetoed the bill.

"While the policy of periodically reviewing tax credits to see if they are performing as intended and need to be continued is commendable, the bill as amended chooses to only review certain tax credits while deciding other credits do not require a review. This inherently picks winners and losers before any review is done," Bullock wrote in his veto message. "If there is a need for a review, the review should include all tax credits and deductions not just a select few income tax credits."

Among the credits that would have been reviewed was the 25-year-old residential geothermal energy tax credit. The governor also vetoed a tax reform bill, SB 171 by Republican Sen. Bruce Tutvedt of Kalispell, which also would have repealed the geothermal credit.

How many use it, and at what cost?

The number of taxpayers who have directly benefited from the credit is unknown to the Department of Revenue. Using the numbers available, 1998-2001 and 2006-2014, the Chronicle calculated an average of 167 taxpayers per year claiming the credit.

Multiply that by 23 tax years (1991-2014) and the number of beneficiaries is an estimated 3,841. Another estimate by the U.S. Census Bureau put the number of housing units in Montana at 491,531.

An estimated 0.7 percent of Montana homes have geothermal systems subsidized by taxpayers.

A decade after its enactment, Sen. John Cobb, R-Augusta, passed a measure bumping it up to a one-time $1,500 credit and allowed it to be carried forward for seven years.

The payout jumped accordingly. The 217 geothermal system credits claimed in 2001 cost the state $41,230. In 2014, the most recent year for which numbers are available, there were 207 credits awarded, totaling $253,535.

To spur installation of geothermal systems in spec homes and large corporate buildings, Sen. Jeff Essmann, R-Billings, sponsored passing legislation in 2005 that extended the credit to corporations. But according to the Department of Revenue, this provision has not been used in the 10 years since it passed.

Compared to other states

Not every state has a geothermal tax credit. Instead of a fixed sum, Utah allows an individual income tax credit for residential geothermal systems for 25 percent of the installed cost up to a maximum of $2,000.

In 2009, New Mexico created a $9,000 tax credit with the option of carrying it forward for 10 years. The State of Maryland offers a $3,000 rebate for each residential geothermal heat pump system.

Pennsylvania's 2008 Legislature approved the use of state bonds to fund a loan program for the installation of residential geothermal systems. The loan amount cannot exceed $3 per square foot of the space to be served or exceed 50 percent of the project's total cost.

Under a 2012 law set to expire at the end of the year, Iowans can claim an individual tax credit up to 20 percent of the federal government's 30 percent credit. In other words, a 6 percent deduction for geothermal heat pumps installed on a residential property.

Origins of Montana's geothermal credit

Most residential geothermal systems in Montana use a device known as a ground source heat pump. They are highly efficient, 30 to 50 percent more efficient than gas furnaces, and produce either heating or cooling.

The national average cost of a horizontal, closed loop ground-source heat pump system is $29,500, according to But in Montana it's more common to use an open loop system using two bore holes, an input and output water well.

In 1991, Sen. Bob Williams, D-Hobson, introduced a bill at the behest of Pacific Power & Light to encourage the use of geothermal systems in residential homes. At the time, a heat pump cost from $6,000 to $12,000 and communities across the state, but namely Libby, were attempting to improve air quality by getting away from wood stoves. Proponents included environmentalists and utilities.

The bill passed 71-29 in the House and 40-9 in the Senate, after amendments reduced the credit from $3,000 down to $250 per year for four years. It was signed by Republican Gov. Stan Stephens.

Williams, an Army veteran who helped rebuild East Germany in the early 1950s, was an electrical lineman by trade and first elected to the state Senate in 1984. Now 86, he recently moved into assisted living in Missoula where his son Dirk resides.

"Dad just believed there were a lot of ways to make energy and they didn't all have to come from fossil fuels," Dirk Williams told the Chronicle in a recent interview. "He had electricity in his blood, but he looked at energy as coming from a diverse field of sources ... He was no hippie. Dad was a staunch proponent of Colstrip, but he saw a need for diversity in the supply chain."

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Troy Carter can be reached at 582-2630 or He's on Twitter at @cartertroy.


Troy Carter covers politics and county government for the Chronicle.

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