Tax Expenditures as Tools for State-Level Climate Action in the U.S.

State governments in the United States offer a wide range of tax incentives to encourage the use of green technologies and support the energy transition away from fossil fuels. These tax incentives offer a politically palatable middle ground that subsidizes more environmentally friendly policies while also giving the appearance of reducing taxes. In this paper, we evaluate the extent of climate-related tax expenditures (i.e. the amount of foregone revenue from tax preferences) at the state level by collecting data from U.S. state budget documents and classifying and comparing the different types of tax expenditures across various dimensions. Our analysis yields three key findings: (1) ‘climate-friendly’ tax expenditures at the state level account for only about 0.1% of aggregate state tax collections and are negligible relative to federal incentives historically, (2) energy subsidies make up more than half of the incentives in dollar terms, and (3) both climate and fossil fuel subsidies exhibit substantial longevity due to the infrequency with which governments revisit or re-evaluate them. While these results suggest that there may be opportunities to better utilize tax incentives for climate policy, tax expenditures must be integrated more strategically into the broader landscape of budget and tax policy to efficiently advance climate goals.