Inflation Reduction Act
Contacts: Sheila Gall, Brianna Morin, Shannon McClelland
Table of contents
Background
The Inflation Reduction Act (IRA) of 2022 is one of several pieces of major legislation passed by the federal government in the last three years. Together, the Bipartisan Infrastructure Law, the Chips and Science Act, and the IRA make up a sweeping package of investments in the country’s infrastructure and sustainability efforts. Intending to address climate change and bolster the U.S. energy industry, the IRA provides $369 billion for domestic renewable energy production, greenhouse gas reductions, drought resilience, clean vehicles, and more, with the goal of a 40% reduction in U.S. emissions by 2030.
The Inflation Reduction Act is so called because it is designed to raise more revenue than it spends, decreasing the country’s deficit and inflation. It aims to raise $738 billion in revenue and authorizes $391 billion in spending and $238 billion in deficit reduction over a period of ten years. It also lowers prescription drug prices, provides three years of healthcare subsidies through the Affordable Care Act, and includes important tax reform measures.
As a budget reconciliation bill, the IRA is not regulatory legislation. Due to its many tax credits, and provisions that expand and modernize the Internal Revenue Service, the IRA is sometimes seen as a tax bill. However, its scope is much larger. It provides incentives and competitive funding programs for climate solutions, environmental justice, job creation, and economic development and leverages billions of dollars in private capital. Its climate related spending is made through a combination of innovative tax credits, financing mechanisms, and grants for state and local governments, businesses, individuals, and non-profit and community-based organizations.
The Inflation Reduction Act delivers affordable clean energy for Washington.
The IRA prioritizes environmental justice in communities and advances the current administration’s Justice40 Initiative. The goal of the initiative is to deliver “40% of the overall benefits of climate, clean energy, infrastructure, and other investments to disadvantaged communities, including Tribes, communities with environmental justice concerns, rural areas, and energy communities.” (Inflation Reduction Act Guidebook) Likewise, the IRA’s tax provisions and grant programs are designed to benefit working families and underserved populations. For instance, the law offers bonus credits for projects located in economically distressed communities.
Given the magnitude of the legislation, and the recent federal budget negotiations, many of the IRA’s provisions have not yet taken effect and guidance from the IRS is pending. AWC is tracking the implementation of the law and will continue to share city-relevant information here—make sure to check back regularly for updates and information.
News
- EPA: $2 billion available through the agency’s new environmental and climate justice Community Change Grants Program. More
The IRA for cities
City leaders have an important role to play in realizing the benefits of the IRA within their communities through direct assistance and leveraging partnerships. With $47 billion of assistance available to local governments, cities can directly benefit from the provisions of the law. The IRA creates programs and funding sources that local governments can align with, leverage, and help others to access through partnerships and coordination.
A new guidebook, Climate Action and the Inflation Reduction Act: A guide for local government leaders, notes that “a key role for local governments and their partners will be to inform, support, and assist local businesses, organizations, and individuals to tap into [the law’s] financial incentives.” As leaders of their communities who engage with stakeholders from across the spectrum, cities are uniquely positioned to advance the law’s environmental justice goals and work towards a more equitable distribution of federal and private investments among disadvantaged communities.
Many of the IRA programs fit into one or more of the following climate-related categories important to cities:
- Air quality and greenhouse gas reduction
- Housing
- Community resilience
- Clean vehicles
- Workforce development
For an in-depth look and a list of funding programs for which cities are eligible to apply, see the full guidebook.
Local leaders should be “prepared to play several roles beyond funding recipient and program administrator, including convening, partnering with, and supporting organizations and businesses to access IRA resources:
- Apply for funding that is directly available to local governments.
- Protect against detrimental impacts of new or continuing fossil-fuel facilities.
- Support and partner with frontline communities and community-based organizations to center their priorities and secure resources.
- Assist businesses and individuals to access new tax credits and higher incentives by fostering economic inclusion and workforce development.
- Streamline permitting processes and train staff to remove obstacles to installation of renewable energy systems, vehicle charging infrastructure, and highly efficient equipment.
- Engage and coordinate across jurisdictions regionally and with states, tribes, utilities, and ports.”
Direct pay
Many of the IRA’s clean energy tax credits and rebates are for individuals and households. However, the Act also contains an innovative provision that allows non-taxable entities (such as cities), looking to or already investing in clean energy production, to receive a direct payment from the federal government in lieu of a tax credit. This new credit delivery mechanism, called “direct pay” or “elective pay,” is applicable from January 1, 2023, through December 31, 2032.
The National League of Cities writes, “Tax exempt entities… can take advantage of the direct pay option under a variety of tax credits for both the production of and investment in clean energy. The Production Tax Credit (PTC) provides an ongoing tax credit for the first ten years of a project based on the amount of renewable energy produced in each year and sold to an unrelated person. The Investment Tax Credit (ITC) are one-time tax credits based on a percentage of the qualifying costs of a project.”
The IRA provides new and expanded tax credits eligible for the direct pay option:
Production tax credits
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Investment tax credits
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Renewable Energy Production Tax Credit (Section 45)
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Energy Investment Tax Credit (Section 48)
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Carbon Capture and Sequestration Tax Credit (45Q)
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Advanced Energy Project Credit (48C)
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Nuclear Power Production Tax Credit (45U) – New
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Clean Electricity Investment Tax Credit (48E) – New
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Clean Hydrogen Production Tax Credit (45V) – New
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Commercial Clean Vehicle Credit (45W) – New
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Advanced Manufacturing Production Tax Credit (45X) – New
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Alternative Fuel Refueling Property Credit (30C)
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Clean Energy Production Tax Credit (45Y) – New
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Clean Fuel Production Credit (45Z) – New
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National League of Cities, 2023
Check out this chart from the IRS describing each of the 12 elective-pay-eligible tax credits. For a better understanding of the direct pay provision, read the full article from the National League of Cities: How local governments can use direct pay on clean energy projects and check out this blog post from the Bipartisan Policy Center.
More elective pay resources:
Funding opportunities
Trainings and other educational opportunities
The IRS is hosting upcoming office hours (schedule below) for direct pay applicable entities that have questions specifically about the pre-filing registration process.
EPA: Investing in America: Climate Action funding fair
View the presentation slides
Resources