HOT TOPIC: The Inflation Reduction Act

WHAT IS THE INFLATION REDUCTION ACT? WHAT DOES IT COVER?

The Inflation Reduction Act became law at the end of August 2022. This legislation was the culmination of many months of negotiations and years of legislative proposals that ultimately comprised the foundation of the provisions—the reconciliation legislation—that provided the framework and funding plan for a number of key priorities of the Biden administration. The legislation, now known as Public Law 117-169, can be reviewed here.

Notable in the legislation is a significant prioritization of climate and energy-related provisions that make up almost $369 billion of its total $773 billion price tag.

Other key priorities covered in the law include a prescription drug plan that provides additional authorization for Medicare to negotiate drug prices, adjustments to the cap on the out-of-pocket prescription drug expenses for Medicare enrollees, and a multi-year extension of Affordable Care Act subsidies. Additionally, the legislation provides subsidy support for American farmers, several billion dollars for transportation and infrastructure related programs, and grants targeted to disadvantaged communities. The legislation allocated significant funding for the IRS to hire thousands of new enforcement officers with an expectation that the additional support will help to bring in billions of dollars in additional tax revenue, and a new 15% “book tax,” or Alternative Minimum Tax for US corporations of over $1 billion in revenue, that was included to ensure a baseline of tax liability for every US company.

Perhaps most notable for Senator Manchin of West Virginia, whose acquiescence made a last-ditch effort to pass the legislation in a divided Senate possible, was the inclusion of a permanent tax rate for the Black Lung Disability trust fund, which is important to West Virginian coal miners. The additional side deal Senator Manchin extracted from Senate Majority Leader Schumer, would fast-track certain oil and gas infrastructure developments, including a key pipeline, was included in exchange for Manchin’s vote that allowed the IRA to move forward. This side deal was later jettisoned in a blow to Senator Manchin—a situation that many believe may make the Senator incredibly vulnerable should he seek re-election at the end of his current term.

WHAT IS THE FOCUS OF THE CLIMATE AND ENERGY PROVISIONS—WHO ARE THE BIG WINNERS IN THIS LAW?

In general, though not exclusively, the big winners in the energy and climate provisions of the law are the wind and solar industries (including manufacturers); utilities who are already transitioning to renewables or who have the resources to make great strides in this area; electric vehicle manufacturers and the manufacturers who supply their components; companies who extract minerals for batteries such as lithium; and large oil and gas companies who have the infrastructure to invest in offshore leases and new carbon and methane capture systems. Additionally, homeowners stand to have the opportunity to make use of significant incentives, tax deductions, and credits directed toward energy efficiency improvements in their homes. Hundreds of billions of dollars, much of it new spending, is divided among scores of climate and environment priorities that cut across many industry sectors.

SPENDING PROVISIONS OF NOTE

• $2.8 billion in grant awards and $200 million for technical assistance to state and local governments for items such as air pollution monitoring; investments in low- and zero-emission technologies; mitigating climate/health risks from extreme heat, wildfires, and urban heat islands; general climate resiliency; reductions of indoor air pollution; helping to increase the engagement of disadvantaged communities and state and federal groups, rulemakings, and public participation.
• Enhances the EPA oversight and discretion over the $27 billion Greenhouse Gas Reduction Fund, allowing the agency to invest in clean energy technologies via green banking, offering federal financing for projects. The Greenhouse Gas Reduction Fund would invest in nonprofit, state and local financing institutions designed to rapidly deploy low- and zero-emission technologies by leveraging investment from the private sector. States and municipalities are eligible to oversee an additional $7 billion of funds in the program.
• Provides a significant amount of funding and authority for the Environmental Protection Agency (EPA), with the EPA set to receive over $41 billion. (Includes funding to improve the efficiency of environmental review permitting and project approvals.)
• $250 million for the EPA to work on the development of Environmental Product Declarations to track GHG emissions of construction materials. $100 million for EPA to work with General Services Administration (GSA) and Federal Highway Administration (FHWA) to identify low-carbon construction materials.
• $2.15 billion to GSA to identify, purchase, and install low-carbon materials and products in federal buildings.
• $250 million to GSA for the pursuit of sustainable federal buildings.
• $5 billion in appropriations for the Department of Energy’s loan programs, which could support up to $250 billion in loans or refinancing guarantees for energy infrastructure projects. Loans must be focused on projects that “retool, repower, repurpose, or replace energy infrastructure no longer operating, as well as enable existing energy infrastructure to avoid, reduce, utilize, or sequester air pollutants and greenhouse gas (GHG) emissions, which would be defined as including carbon dioxide, hydrofluorocarbons, methane, nitrous oxide, perfluorocarbons, and sulfur hexafluoride.”
• $2 billion for direct loans from the Department of Energy to nonfederal borrowers to construct or modify electric transmission facilities deemed necessary to the national interest.
• $1 billion to support Department of Energy efforts to push state and local governments to update their buildings codes. ($300 million of this amount supports states and local efforts adopt residential and commercial building energy codes that meet or exceed the 2021 International Energy Conservation Code, the ASHRAE Standard 90.1-2019, or a combination of these cited codes).
• $670 million in additional money for states and local governments to adopt building codes that will meet or exceed the zero-energy provisions in the 2021 IECC, as well as to implement plans to achieve compliance with updated building energy codes.
• $5.8 billion for the Department of Energy to provide financial assistance for domestic, nonfederal, nonpower industrial or manufacturing facilities engaged in energy intensive industrial processes to purchase, install, retrofit, or upgrade advanced industrial technology to reach net-zero GHG emissions.
• $3 billion for loans from the Department of Energy for the advanced technology vehicles manufacturing incentive program to support facilities in the U.S. in producing low or zero GHG emission vehicles as well as $2 billion for grants for domestic production of fully electric, hybrid, or hydrogen-powered vehicles.
• $3 billion for award grants and rebates for the purchase and installation of zero-emission equipment and technology at U.S. ports.
• $8 billion for competitive grants that have a goal of providing low-income and disadvantaged communities the technical and financial assistance needed to lower their greenhouse gas emissions.
• $250 million for EPA planning grants, and $4.75 billion for EPA implementation grants to support state, local, and tribal government programs and policies that result in GHG reductions.
• Approximately $9 billion for state, local, and tribal governments to deal with environmental issues related to forest management/fire mitigation, coastal issues related to climate change, and drought-related impacts.
• Approximately $10.5 billion in state, local, and tribal grants for rural and interstate electric systems and transmission lines.
• $30 billion in targeted grants and loans for states and electric utilities to help push forward the transition to clean electricity.
• $9 billion for federal procurement of American-made clean and low-emission technologies, to create and sustain a market for such products.
• $27 billion in grants for a clean energy technology accelerator to help support the deployment of technologies to reduce emissions, with disadvantaged communities as the focus.
• $10 billion in grants to build clean energy technology manufacturing facilities (products like electric vehicles, turbines, solar panels), and $2 billion in grants for retooling existing manufacturing facilities to instead make electric vehicles. $20 billion in loans to build new clean/electric vehicle manufacturing facilities.
• $2 billion for the national labs specifically to help accelerate and advance energy efficiency-related research.
• $3 billion for Neighborhood Access and Equity Grants to support equity, safety, and affordable transportation for disadvantaged neighborhoods.
• Provides an additional $4.3 billion in grants to state energy offices to carry out the High-Efficiency Electric Home Rebate Program, to provide tax relief to homeowners who reduce electricity usage through appliance and non-appliance (e.g., insulation, wiring) upgrades. Rebates are based on purchase costs. Owners would be limited to $14,000 in total rebates though an owner’s income could not be greater than 150% of the median area income.
• $4.3 billion for grants to state energy offices to carry out a Homeowner Managing Energy Savings (HOMES) tax rebate program, giving tax relief to homeowners who reduce their energy use by investing in “whole-house energy savings retrofits.” Rebates must be based on the reduction in energy usage. State energy offices must submit plans to implement the program, including procedures to calculate energy usage and savings. This will provide rebates for homeowners and aggregators for energy savings retrofits on single family homes and multifamily buildings.
• $3 billion for the Postal Service to buy zero-emission vehicles.
• $1 billion in grants for clean heavy-duty vehicles like school and transit buses and garbage trucks.
• $200 million for states to develop training programs for contractors in needed climate/energy efficiency industries.

TAX PROVISIONS OF NOTE

In general, the law extends several already-existing tax programs and that promote environmental goals and clean energy. Many of the incentives include commercial credit for renewable electricity infrastructure development and production, as well as a heavy focus on direct consumer energy benefits for efforts that result in renewable energy generation in the home. Some of the tax provisions seek to provide tax certainty for already existing and emerging energy technologies such as, renewables, energy storage, nuclear, hydrogen, and carbon capture. Significant incentives are included for low- and moderate-income households to electrify their homes, such as through replacement of fossil-fuel furnaces, boilers, water heaters and stoves with high-efficiency electric devices.

THE MOST IMPACTFUL TAX PROVISION FOR COMMERCIAL/MULTIFAMILY BUILDINGS

Tax Deduction for Energy Efficient Buildings (179D). This is an enhancement of an existing credit the purpose of which is to help make commercial and multifamily buildings more energy efficient. This deduction operates on a sliding scale that bases the value on increasing levels of building energy efficiency. Minimum efficiency gain is 25% over baseline, for a 50 cent/sq ft deduction. Scale increases to 50% efficiency gain/$1 per sq ft. Larger “bonus” rates up to $5/sq ft can be earned if prevailing wage and apprenticeship requirements are met. New Construction must model at least 25% above a baseline of ASHRAE (2007) for the next few years, and then ASHRAE 90.1 (2019) thereafter** (**the baseline ASHRAE requirements are being reviewed and may be changed in guidance.) An “alternative deduction” is created for Existing Buildings which allows buildings to measure against their own baseline, but the deduction may be claimed only after all equipment is in service for one year, and the building provides proof that it has improved its site EUI by the required amount at the end of the year (must be certified by an architect/engineer.) REITS may reduce earnings and profits in the year that the energy components are installed (not over 5 years as required by current law).

OTHER TAX PROVISIONS OF POTENTIAL INTEREST

• Energy Efficient Home Improvement Credit (25C) (renamed from the nonbusiness energy credit) Homeowners who do not qualify for the HOMES rebate program, or the High-Efficiency Electric Home rebate program could take a tax credit of up to $2,000 to install heat pumps, or up to a $1,200 annual tax credit to install other energy efficiency measures.
• Residential Clean Energy Credit (25D) (renamed from the Residential Energy Efficiency Property Credit) is extended through CY2034 and expands the credit to include battery storage, offering a 30% credit through CY2032, and decreasing for CY2033, and CY2034. Provides a credit for residential solar, wind, geothermal, and biomass purchase and installation.
• Creates electric vehicle tax credits for lower- and middle-income buyers to bolster consumer demand for electric vehicles with a $4,000 incentive for the purchase of used EVs (25E), and $7500 for the purchase of new EVs manufactured in the U.S. (30D).
• Electric Vehicle Charging Stations Tax Credit (30C) is extended in the law and capped at $100,000 for each charging station installed at a property. Must be located in either a low-income or high-poverty census tract, or a rural area.
• Energy Investment Tax Credit (Section 48) is extended for energy property projects focused on solar energy property, geothermal property, fiber-optic solar property, fuel cell property, microturbine property, small wind property, offshore wind property, combined heat and power property, and waste energy recovery property constructed before the beginning of 2025. Adds additional qualified projects such as energy storage and dynamic glass projects. (Replaced by the (new) Clean Electricity Investment Tax Credit [48E] in 2025).
• Advanced Energy Project Credit (48C) is an extension of an investment credit of 30% to support domestic energy manufacturing and the recycling of clean energy products. Includes industrial heat, carbon capture, and storage systems, and equipment for recycling, among other items.
• Carbon Capture and Sequestration Tax Credit (45Q) updates the existing tax credit for carbon capture and direct air capture for industrial facilities and power plants.
• The tax credits for carbon capture investments are extended through FY2033 and several existing incentives are renewed, including credits for alternative fuels, carbon capture facilities, and energy efficiency improvements for residential and commercial properties, among others.
• New Energy Efficient Home Credit (45L) extends the new construction residential tax credit for all single- and multi-family buildings. Establishes a base credit for energy efficiency improvements, and a credit for Zero Energy homes/units for both SF and MF. For multi-family, use of the credit includes a requirement for compliance with prevailing wage rules in order to access high “bonus” rates of $2500/unit and $5000/zero energy unit, which may eliminate the value of the credit itself.
• Energy Credit for Solar and Wind creates a 40% investment tax credit for solar and wind projects largely in low-income areas.
• Renewable Electricity Production Tax Credit (45) is an extension of a current tax credit for renewable energy sources such as solar, wind, geothermal, biomass, hydropower, etc.
• Nuclear Power Production Tax Credit (45U) creates a nuclear power production tax credit based on the kilowatt hours of power produced.

IS THERE ANYTHING IN THE LAW SPECIFICALLY FOR COMMERCIAL BUILDINGS?

While there are grant and loan programs for industrial manufacturers to update and transition production to more low-energy products, the law does not provide for any significant or direct funding to provide incentives for private sector commercial buildings to upgrade their facilities. However, the law does make changes to an already-existing tax deduction, the 179D commercial and multifamily Tax Deduction for Energy Efficient Buildings, to help spur additional projects. For new construction, the baseline is increased energy efficiency based on a minimum 25% improvement over an ASHRAE 90.1 baseline (as written in the law, it is either the 2007 or 2019 versions. This may be clarified in guidance). For Existing Buildings, the law creates a new “alternative” deduction, basing the improvement baseline on the building’s own site EUI. However, retrofit deduction amounts may only be claimed by the taxpayer after equipment is in service for one year and the project can prove it has resulted in the anticipated/claimed EUI reductions. This proof must be certified by an architect or engineer.

The law creates a sliding scale deduction that increases in value based on the increasing energy efficiency of the building. Under the deduction scale the base rate may reach up to $1/sq ft. To deduct the much higher “bonus” rate, the project must comply with accompanying prevailing wage and apprenticeship requirements. These labor requirements are currently the subject of pending guidance from the Internal Revenue Service, however, the structure of the “bonus rate” deduction scale has come under criticism because the cost of the labor requirements may quickly overtake the value of the bonus rates of the deduction, creating a disincentive to pursue the deduction.

WHAT ABOUT PUBLIC BUILDINGS?

Without question, the federal government is given significant spending authority and appropriations to pursue the priorities contained within the law. Of note, the Department of Energy is given $250 million to pursue the creation of Environmental Product Declarations to help the federal government identify and purchase low-carbon building and construction materials. The General Services Administration (GSA) has provided over $2 billion to identify, purchase, and install low-carbon construction materials. These funds dovetail with funds already provided to the GSA and Department of Energy under the massive infrastructure law passed in 2021. The work of developing EPDs and identifying and spurring the creation and manufacture of low-carbon buildings and construction materials is going to be a significant and impactful effort by the federal government, using the federal government’s purchasing power in the marketplace to drive private sector change. In addition, the GSA received an additional $250 million for their ongoing work on upgrading the energy efficiency and sustainability of federal buildings.

WHEN DOES ALL OF THIS HAPPEN? HOW LONG WILL IT TAKE THE GOVERNMENT TO IMPLEMENT THE IRA?

Federal departments and agencies are hard at work deciphering the content of the IRA and working to put together underlying programs and write the accompanying guidance and rules. By the end of the 2022 calendar year, we can expect that there will be additional clarity available on the expected timelines for guidance, as well as significant progress in establishing rules and funding streams for grants and incentives to/for state, local, and tribal governments under the many programs covered in the law.

WHAT’S THE BEST WAY TO KEEP TRACK OF HOW THINGS ARE BEING IMPLEMENTED?

One of the best ways to track actions by the government departments and agencies is to check the Federal Register on a regular basis. The Federal Register is a daily federal government publication that provides information on the official rules and regulations being considered or finalized by departments and agencies. You can find the Federal Register at http://www.federalregister.gov.

In addition, you can check the website http://www.reginfo.gov for information on regulations and rules that may be transitioning from their drafting stage to their review stage at the Office of Management and Budget (OMB), which works on behalf of the White House to ensure that departments and agencies are comporting their regulations and rules with White House policy priorities, as well as compliance with the law.

It is also useful to follow the press departments of key federal departments and agencies on social media, such as Twitter, because they often will announce via their press offices the publication on their websites of Requests for Information. What happens if the election changes the balance of political power—how are the provisions in the IRA impacted? In the modern era, U.S. elections have the tendency to swing the control of the branches of government like a pendulum, moving power between the two major political parties on a somewhat regular, though not precise, basis. Should the congressional balance of power change in the November 2022 election, we can expect a couple of things:

1. The work of the departments and agencies on implementing the Inflation Reduction Act will continue, because it is based on a law passed and signed by the president. It is a basic tenet of federal government bureaucracy that once a government program is passed and implemented, it is almost impossible to truly pull it back or eliminate it. We can expect that the vast majority of provisions passed in the Inflation Reduction Act will proceed and that the administration may in fact work faster to ensure they are pushed out to the states, local, and tribal governments, and that the tax provision guidance will be completed and issued as quickly as possible.
2. However, a Republican majority in the House or Senate will take a close look at provisions in the law with which they have concern, or that draw lawmaker attention through sheer cost or aggressive goals. We can also expect that the House and/or Senate will conduct frequent hearings or investigations of the programs contained in the law, and that they will seek in some cases to use different procedural maneuvers—such as appropriations “riders” that ban federal funding for implementation of some programs—to delay different programs or funding streams from being implemented in the marketplace.