After a year of high-stakes negotiation and last-minute reversals, Congress eked out a bill through the evenly divided Senate (with VP Harris breaking the tie) before sending the final legislation, dubbed the Reduce Inflation Act of 2022, to President Biden, who signed it into law this week.
The Inflation Reduction Act of 2022 seeks to Reduce the Federal Deficit (and Tame Inflation)
The Inflation Reduction Act of 2022 (IRA) began its tortured journey through Congress first as the Green New Deal and later the Build Back Better Act – a massive spending proposal that flamed out multiple times after Democratic Senators Manchin (WV) and Sinema (AZ) pulled their support due to concerns over inflation and increased deficits.
But as the midterm elections approach, a last-minute budget reconciliation deal was consummated.
Unlike its predecessors, the scaled-down IRA reduces the Federal deficit significantly – a requirement for budget reconciliation bills that bypass the filibuster.
According to the bi-partisan Committee for a Responsible Federal Budget, the Inflation Reduction Act would trim the deficit by $330 billion between 2023 and 2031, and over a longer timeframe, would save $1.9 trillion (between 2023 and 2042).
The IRA accomplishes this through a combination of $900 billion in new spending, $2.4 trillion in offset savings, and $400 billion in interest savings.
The bill’s proponents claim that significantly reducing the Federal deficit over time will help reduce inflation, although most of the savings come in the period between 2031 and 2042.
Carbon Pricing is Out, Tax Credit Incentives to Avert Climate Change Are In
After reducing the deficit (and hopefully helping to tame inflation over the long term), the second major thrust of the IRA is to reduce US greenhouse gas emissions through targeted tax credits, hopefully helping us meet our international commitments at the Paris Climate Accords, which seeks to limit global warming to below 2 degrees Celsius.
The introduction of the IRA’s tax credit incentives marks a major strategic shift away from carbon pricing and cap-and-trade policies that have long been considered by Congress (and many economists) for decades as the preferred “free market” approach to reducing greenhouse gas emissions.
What’s the projected cost? The new tax incentives intended to help speed up the transition to a cleaner green economy will cost $369 billion.
But will it deliver the goods?
According to the Rhodium Group, the IRA should lower emissions by 32 – 42% by 2030 (compared to a 2005 baseline).
Researchers at Princeton point out that this is significantly lower than our current trajectory of 24-27% reductions by 2030 – albeit not as good as the House’s failed Build Back Better Act which would have theoretically cut emissions by 46%.
Tax Incentives for Clean Energy Production, Including Wind, Solar, and Energy Storage Development
Transforming our nation’s energy sector to become a cleaner, more environmentally friendly system is a tall order.
And it’s hard to discern an overall strategy just by looking at the different provisions and tax credits within the new law, including $44 billion for production tax credits for promoting wind, solar, battery storage, and hydrogen technologies.
However, we like the way that the Rhodium Group has analyzed the situation, an approach they call the “4 Rs” of transitioning to clean electric generation:
· Reinvigorate Creating New Clean Electricity Production Capacity
The IRA includes significant investment tax credits (ITCs) and production tax credits (PTCs) for adding new clean energy capacity to the grid.
The IRA also extends the tax credits for wind and solar projects for another 10 years.
Green hydrogen production (via clean energy sources) will earn a new $3/kg tax credit.
Finally, a new 30% investment tax credit will apply to stand-alone energy storage projects, a critical component necessary to ensure solar and wind-powered grids are capable of providing power at night.
· Retain Existing Nuclear Capacity
The IRA offers $30 billion in production tax credits (PTCs) to encourage existing zero-carbon nuclear plants not to shut down.
· Retire Carbon-Emitting Electric Plants
The IRA encourages the retirement of fossil-fuel-based production capacity through changes to USDA (for rural electric co-ops) and DOE loan programs.
· Retrofit Carbon-Emitting Electric Plants
The IRA supports retrofitting existing electric generation plants powered by fossil fuels through Q45 carbon capture tax credits. The IRA ups the value of these carbon credits, which will range from $85/ton to bury C02, to $60/ton for using C02 industrially (such as in advanced oil recovery e.g. fracking), to $180/ton for capturing C02 directly from the air.
The IRA also includes provisions to resume offshore oil and glass leases in the Gulf of Mexico to provide energy in the short term. However, methane leaks from oil and gas facilities will be subject to a hefty tax to reduce greenhouse gas emissions from wellheads, pipelines, and other sources of leaks – despite industry claims that existing regulations are sufficient.
A Mix of Industry and Consumer-Facing Tax Credits for Electric Vehicles (EVs) and Energy Savings at Home
The Inflation Reduction Act also has a series of tax incentives designed to encourage industry to shift the production of batteries, EV components, and solar equipment to North America. As we’ll see, some of these tax credits apply to industry directly while others are consumer-facing.
The IRA provision that has gotten the most notice in the press is the extension of the $7,500 credit for purchasing a plug-in electric vehicle (EV). While previously, this credit was available to purchasers of new vehicles, it had some limitations. First, consumers had to wait until filing their annual taxes to get the credit in the form of a refund, and the full credit was limited to the first 250,000 EVs sold by each manufacturer – meaning that Tesla, GM, and Toyota had long run out of credits to offer consumers.
The new law’s provisions (which go into effect in 2023) eliminate the 200,000 vehicle quota for each manufacturer; however, there are some new strings to get the full $7,500 credit, which is now offered as an immediate direct discount at the time of purchase. First, the new vehicle can’t cost more than $55k ($80k for trucks), second, the purchasers’ annual income must be below $150k, and third, the vehicle itself must be assembled in North America – and, starting in 2024, a majority of its battery components must be sourced from North America or a US free trade partner (e.g. NOT China.)
(There is also a new $4,000 credit for the purchase of a used EV costing up to $20k or less, which has no restriction on the origin of the car or its battery.)
To help EV manufacturers upgrade their factories (or build new ones), the Inflation Reduction Act also offers an additional $15 billion in credits and loans. The legislation also increases the tax credit for EV charging stations from $30k to $100k per charger – the $100k per charger incentive also applies to commercial fleet owners.
Turning to construction, the IRA includes significant new tax changes for residential home users seeking to upgrade their homes to use greener, more energy-efficient appliances and solar systems.
The law expects to spend $14.5 billion on tax savings for homeowners over the next 10 years, a major increase over the previous tax law. One of the major changes is the removal of a lifetime cap on tax savings; instead, homeowners can claim a 30% tax credit (of up to $1,200 per year) on energy-efficient home improvements. In addition, the IRA also allocated $9 billion in rebates for consumers in lower income brackets who would not benefit from tax credits.
Green Bank: An Option for Investing in Renewable Projects
Another important element of the Inflation Reduction Act is the introduction of a new $27 billion revolving fund to support new energy efficiency products, such as solar or wind farms.
Dubbed “the Green Bank,” this fund is intended to support public-private partnership projects. Rather than providing a one-time grant, the new entity will loan out funds, and repayments will (hopefully) replenish the coffers down the road, allowing for the money to be lent out again for more energy-efficient projects.
Tax Law Changes Hit Stock Buybacks Plus a Minimum Corporate Tax Enacted and Increased IRS Enforcement
So, by now, you may be asking, if the Inflation Reduction Act is intended to reduce the Federal deficit in the years to come, how will it be funded – particularly in light of these expenditures on green energy projects?
There are three areas identified for increased tax revenues.
· Increased Tax Compliance
The Inflation Reduction Act will inject $80 billion into the IRS to increase overall tax revenues through increased taxpayer compliance. The IRS has been underfunded for decades, and investments in both technology and higher-level auditors should help reduce the millions of tax returns in the pipeline as well as uncover hidden income from tax cheats.
· Tax on Stock Buy-Backs
The Inflation Reduction Act also relies on another strategy to raise tax revenues – by adding a 1% tax on corporate stock buybacks. This new tax is estimated to raise $74 billion over the next 10 years.
· Minimum Corporate Tax
The other new key provision for raising revenues in the Inflation Reduction Act is the introduction of a new 15% minimum corporate tax for companies with more than $1 billion in “book income.” The new tax is expected to raise $220 billion over 10 years, but there are questions as to how this will work in practice, with critics pointing out that some companies will shift profits overseas or rely on existing tax credits and incentives to reduce their tax burden below 15%
Can Ambitious Projects be Completed Quickly Enough to Meet the Rapid Timeline Goals?
The provisions outlined in the Inflation Reduction Act are sweeping in their scope.
But can they deliver the changes to our energy system in the short timeframe at hand?
This is a question that many analysts are asking.
Given our current track record, it seems unlikely that all the infrastructure projects can be built and come online by 2030 – unless changes are made to streamline approval processes for issuing permits.
Interestingly, Florida recently passed a law that incentivizes local permitting agencies to speed up the issuance of residential permit applications – if the local agencies fail to review the permit applications within 10 days, the applicant gets a 20% refund, with a further 10% refund each following day, up to 50%.
Congress is attempting to speed up the permitting process for infrastructure projects as well. This provision, however, could not be included in the Inflation Reduction Act, which passed the 50-50 divided Senate through a special reconciliation bill that can’t include non-revenue-based legislation.
The next chance to get the streamlined permitting legislation through the Senate is the vote on the must-pass continuing budget resolution later this year – expected at the end of September.
All eyes are on Washington to see if these provisions pass or not.
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