Early in the green revolution, states, cities, and the federal government enacted tax incentives to promote sustainable construction. These income and property tax benefits were separate from the many tax programs focused specifically on energy efficiency and renewable power.

Many of the tax incentives for green buildings now have been tapped out or expired. Such programs are now dinosaurs that are not likely to be expanded or renewed, for unexpected—but good—reasons. This article explains why.

Some History

Long ago, in the early stages of what we now term the “green revolution”—approximately 2000 to 2008—tax incentives became available to promote green development. These included income tax credits, sales tax credits, property tax abatement, and federal tax exempt “green bonds.” All were “tax expenditures,” meaning the granting jurisdiction agreed to forgo a tax collection in the amount of the incentive.

For example, by allowing $1 of tax credit for a LEED1 building, State A agreed that it would not collect that $1 from the green developer. Thus, State A made the decision to invest $1 of tax in the developer’s green building. Similarly, by granting $1 of property tax abatement, City B also made the decision to invest that $1 in the developer’s building.

There were also non-tax incentives for green construction, mainly zoning bonuses that granted extra floor area or other benefits for qualifying buildings (e.g., LEED Silver, Gold, or Platinum). Zoning bonuses did not take money from the tax pot, but involved planning judgments as to the impact on particular neighborhoods.

The green tax incentives were modeled on earlier tax programs that promoted other types of development for which tax subsidy was deemed vital, such as the federal income tax credits for historic preservation and low-income housing. The core premise of such earlier programs was that, without tax subsidy, the target program was not financially feasible. (Low-income housing is the classic example: Without subsidy such housing rarely can generate a positive return for investors.)

Allocation Caps and Finite Terms

The green building tax credit programs shared certain similarities. For example, most, while grand in purpose, were limited in application—mainly by the use of aggregate caps on the amount of credits available in any one year or by caps on the overall program. Also, most such legislation had a finite term—it would expire after a sunset date unless renewed by legislative action.

For example, New York was one of the first states to enact a state income tax credit for green buildings at the end of 1999.2 However, the legislation allowed only an initial allocation of $25 million, with another $25 million proposed. These cap totals were paltry for the Empire State.

Maryland also enacted a tax credit for green buildings. However, according to the state comptroller’s website, all credits have been allocated through the end of the program.3

New Mexico’s Sustainable Building Tax Credit remains available, although data on the applicable state website suggest that, through 2009, credit allocations were in the low millions.4

The federal tax exemption for interest on so-called green bonds, enacted as part of the American Jobs Creation Act of 2004, also had an aggregate cap—no more than $2 billion of qualifying bonds could be issued.5 While seemingly generous, this $2 billion limit was in fact illusory given the very narrow requirements for qualification (see below), which were so specific that some might argue they were targeted at a particular project.

Limited availability and low utilization are not, however, reasons why green tax credits or other tax incentives will not likely be renewed and expanded. Nor is the financial crisis, which occurred in the period while many such green incentives were available.

Complexity and Poor Drafting

Many of the green tax credit programs had another common characteristic: They were overly complex, or badly drafted, or both.

For example, the New York statute, while reportedly modeled on LEED programs, was very complex and required a number of professional certifications not customary for architects or engineers, both as to compliance with various categories of technical requirements in the original construction and also annually thereafter.

The federal green bond legislation was no better. To issue qualifying bonds a “qualified green building and sustainable design project” had to meet the following requirements:

(1) at least 75 percent of the square footage of commercial buildings must be registered for the U.S. Green Building Council’s (USGBC) LEED certification and reasonably expected (at time of designation) to receive such certification;

(2) must include a brownfield site as defined by the Comprehensive Environmental Response, Compensation, and Liability Act of 1980;

(3) must receive specific state or local government resources of at least $5,000,000; and

(4) must include at least (a) 1,000,000 square feet of building or (b) 20 acres.

A reader probing this statute would find (as the Internal Revenue Service itself did), that the standards were not models of clarity.6

Complexity and bad drafting were not, however, reasons why green tax credits or other tax incentives will not likely be renewed and expanded.

What Were the Taxpayers Getting?

The brief summary of the federal green bond text raises another important question applicable to many of these early green building tax incentives: What were the taxpayers getting for their money?

The federal legislation authorized up to $2 billion of tax exempt bonds for projects that (a) must be registered for LEED certification and (b) must be “reasonably expected” to receive such certification. It did not require actually achieving the LEED rating. It did not even require LEED Silver, let alone the higher ratings.

Many of the state and city tax programs were also keyed to achieving LEED ratings. For example, Cincinnati, Ohio and Howard County, Md., as well as Nevada, grant property tax abatement in graduated percentages keyed to achieving ascending levels of LEED ratings.7

In the rush to enact green incentives, it was assumed that a building that attained a LEED rating was a worthy tax expenditure. As time has passed, however, the LEED programs have been subject to criticism (and at least one legal challenge) that they have various defects.8 Arguably, for example, the LEED requirements do not adequately measure energy efficiency and are not tested by independent third-party verification. Arguably also, as another instance, LEED should not give similar credits to things like bike racks and energy reduction.

This article is not intended as a criticism of LEED, which is the pre-eminent green rating system in the United States (and many other countries). USGBC has regularly refined its programs, and indeed is about to issue another major upgrade of its rating systems.9 The point is simply that the federal, state, and local tax incentives were enacted in haste with little consideration as to what the taxpayers were buying.

Misguided tax expenditures are not, however, reasons why green tax credits or other tax incentives will not likely be renewed and expanded.

Green Buildings Movement, Divided

While the USGBC has been refining its programs while other green rating systems and codes are being proposed and adopted (i.e., the new International Green Construction Code10), a funny thing has happened to the green building movement: It has bifurcated. Now, when property owners and developers speak of green buildings, they really mean energy, lighting, and water efficiency. However, the main focus is on energy, specifically energy efficiency.

While the other categories of “green,” such as site utilization, green materials, green urban planning, traffic and transportation, construction methods, etc., obviously remain important, they fall in the “other” category for many property owners and managers (i.e., other than energy efficiency).

Exhibit A for bifurcation is the runaway movement for energy “benchmarking.” In 2009, New York City adopted four Local Laws focused entirely on energy efficiency.11 These require, among other things, energy audits, retro-commissioning of existing buildings to squeeze maximum efficiency out of the existing old systems, and annual reporting on building efficiency into a city-wide database. As this database expands over the years, it will have a transformative effect on building design and operation by generating increasingly better information on energy efficiency. Capital costs of energy efficiency will decline and energy-efficient building systems will be mainstream. (San Francisco, Austin, and Washington, D.C., have similar programs.12 Other jurisdictions will surely follow.)

Integral to—and also a transformative cause of—the movement toward energy efficiency is the U.S. Environmental Protection Agency’s Portfolio Manager program.13 Using the Energy Star performance rating system, this program enables a building owner to enter data through an online system to compare results for its building to a national database. There is an Energy Star ranking system that identifies buildings that are in the top 25 percent of efficiency in the United States. Used in conjunction with governmental benchmarking programs like those noted above and also by itself the Energy Star program has had a huge impact and is growing exponentially. An Energy Star ranking is fast becoming part of investor and lender due diligence in evaluating the purchase or financing of a property (which, alone, will be an important driver of this trend).

The point for this article is that the energy efficiency revolution does not need tax subsidies. Saving energy saves money. While dozens of new products will be created (and indeed are being created) to achieve energy efficiency, they will pay for themselves. The marketplace will make such products price-competitive without tax subsidy. Indeed, some of the “low-hanging fruit” of the energy revolution does not actually need new hardware—in some instances it just needs better management techniques.

The energy-saving revolution is thus one key reason why tax subsidies will no longer be needed for green buildings.

Reduction in Costs

Another key reason why tax incentives will no longer be needed is that costs of green construction are declining rapidly. At the dawn of green history—around 1999, when New York enacted its green building tax credit—it was assumed that green buildings would cost dramatically more. Even now, experts can give you rule-of-thumb estimates of the incremental cost to build a LEED Silver, Gold or Platinum Building. However, these costs are falling.14 One reason is that there are many more professionals experienced in green design and construction. More professionals mean more knowledge and more experience, both of which mean better ideas and cost-saving designs. Architects and engineers are figuring out how to create green buildings at lower cost. And, of course, a second important reason is that the cost of green materials and components is also falling.

Widespread Adoption of Code Rules

Another key trend obviating need for tax subsidy is the increasing adoption of mandatory green rules in building codes and zoning ordinances. These mandates evolved in three stages. First, cities and states adopted green criteria for their own projects (or for private projects that they funded). Imposing rules on themselves was easier than trying to regulate the private marketplace. Rules for the private marketplace came next—the second stage.15 Cities and states adopted mandatory rules for new private construction or renovation projects. While much second stage legislation has the same flaws as the tax incentives (such as poor drafting, complexity, unclear procedures, etc.), it is nonetheless forcing a result—green is becoming commonplace. Also, like any other type of early-stage legislation, these green “mandates” will likely improve over time through legislative upgrading and legal challenges.

In any event, in each jurisdiction developers are learning how to comply with these new green rules and/or are forcing changes to make such laws more workable. Clearly, if a state or city can compel green design and construction through reasonable and properly enforceable mandates, why waste income tax credits or property tax abatement? In short, why pay for something if you can get it by a legal requirement?

What Will the Taxpayers Get (Redux)?

In the early stages of the green revolution, proponents of tax subsidies expected that green would be much more expensive than conventional construction. Also, they did not spend time to analyze what “green” meant, hence the quick and simplistic reliance on the LEED rating systems as proxies for what would be quickly wonderful. Interpolating a kind of Moore’s Law of Green, however, the technology of the green marketplace is becoming more efficient, better-focused, and more competitive in very brief (if not two year) cycles. Also, what “green” means is now much better—and more precisely—understood. To this point, for example, the green movement has bifurcated into energy-efficiency and everything else. The LEED programs are much improved and still improving. Many jurisdictions have enacted mandatory green rules as conditions to getting building permits and zoning approvals. Costs of green construction continue to decline.

The result of these trends is wonderful. The goals of the original green tax subsidies are being achieved, but tax subsidies are no longer needed.

Peter S. Britell, the author of ‘Green Buildings: Law, Contract and Regulation’ (Law Journal Press, 2010), is a partner at Venable in New York.


1. “LEED” means Leadership in Energy and Environmental Design,” the certification and other programs of U.S. Green Building Council (USGBC). See http://www.usgbc.org/DisplayPage.aspx?CMSPageID=1988.

2. 6 NYCRR, Part 638, available at http://www.dec.ny.gov/regs/4475.html.

3. See http://business.marylandtaxes.com/taxinfo/taxcredit/greenbldg/default.asp.

4. http://www.emnrd.state.nm.us/ecmd/cleanenergytaxincentives/sustainablebuildingtaxcredit.htm.

5. Internal Revenue Code of 1986, as amended, Sec. 142(l).

6. See, e.g., Rick Moriarty, “IRS says Destiny Green Bonds Can Stay Tax-Exempt,” Syracuse.com (March 16, 2012), http://www.syracuse.com/news/index.ssf/2012/03/irs_says_destiny_usa_green_bon.html.

7. See, e.g., Cincinnati Property Tax Abatement for Green Buildings, available at http://energy.gov/savings/cincinnati-property-tax-abatement-green-buildings; Howard County, Md., Planning and Zoning, Green Building Tax Credits, available at http://www.howardcountymd.gov/displayprimary.aspx?id=4294967686#Tax Credits; Nevada, see http://www.leg.state.nv.us/nrs/NRS-701A.html.

8. See, e.g., Franklyn Crater, “Critics Say LEED Program Doesn’t Fulfill Promises,” NPR (Sept. 8, 2010), available at http://www.npr.org/templates/story/story.php?storyId=129727547; Timon Singh, “Frank Gehry Defends His Criticism of LEED,” Inhabitat (June 15, 2010), available at http://inhabitat.com/frank-gehry-defends-his-criticism-of-leed/.

9. See, e.g., “Dive Into LEED 2012,” at http://www.usgbc.org/DisplayPage.aspx?CMSPageID=2360.

10. See, e.g., International Code Council, International Green Construction Code, available at http://www.iccsafe.org/cs/igcc/pages/default.aspx.

11. Local Laws 84, 85, 87, and 88 of 2009. See, e.g., Peter S. Britell and Stuart Saft, “Who to Pay for New Energy Laws Compliance?” N.Y.L.J. (June 21, 2010).

12. See, e.g., Austin Energy Conservation and Disclosure Ordinance, available at http://www.austinenergy.com/about us/environmental initiatives/ordinance/commercial.htm; Leslie Guevarra, “SF [San Francisco] Requires Energy Audits, Benchmarking for Commercial Buildings,” GreenBiz.com (Feb. 10, 2011), available at http://www.greenbiz.com/news/2011/02/10/sf-requires-energy-audits-benchmarking-commercial-buildings.

13. See U.S. Environmental Protection Agency, Energy Star, “How the Rating System Works,” available at http://www.energystar.gov/index.cfm?c=evaluate_performance.pt_neprs_learn.

14. See, e.g., Sally Deneen and Brian Howard, “Buildings that Breathe: Green Construction is Coming of Age,” (includes a quote that green construction often adds less than 1 percent to the cost of a building), available at http://environmental.lilithezine.com/Green-Architecture-01.html. While the evidence is anecdotal, this trend indeed appears to be happening and at an accelerating pace.

15. “For an extensive discussion of government green mandates, see Chapter 3 in Peter S. Britell, Green Buildings: Law, Contract and Regulation (Law Journal Press, 2010, updates 2011-12), available at www.lawcatalog.com).