Green Energy Tax Credits (IRA): Reform
The InflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck will cover less goods, bills, and services. It is sometimes called a “hidden” tax, as it makes taxpayers less wealthy due to increased costs and “bracket-creep”, while increasing government spending power.
The Reduction (IRA) Act introduced a new series of targeted taxA Tax is a mandatory payment collected by local, State, and National governments from individuals and businesses to cover the cost of general government goods, services, and activities.
It is understandable that policymakers are looking to extend the expiring broader tax cuts passed in the Tax Cuts and Jobs Act (TCJA) by repealing these subsidies. It’s understandable that policymakers are looking for ways to extend the Tax Cuts and Jobs Act’s (TCJA) expiring broader tax breaks. House Speaker Mike Johnson (R, LA) described the likely approach for IRA reform as “somewhere in between a sledgehammer and a blade.” This balance can be achieved by using a sledgehammer on policies that aren’t working and a blade on those that are. Cost Estimates versus Revenue Estimates
IRA credit cost estimates vary widely. According to the latest Treasury expenditures report on IRA green credit, it is projected that they will cost $1.16 trillion between 2025 and 2034. This is due to $830 billion of lost revenue and $330 million in outlays. These estimates include costs associated with green credit policies prior to the IRA. Other estimates have put the credit costs higher, mostly due to different assumptions about technology adoption and related regulation. In a recent Cato Institute report, the cost of the IRA over the next ten years was estimated at $1.97 trillion.
However the
tax spendingTax expenditures is a departure from “normal” tax codes that lowers the tax burden for individuals or businesses through an exemption or deduction, credit or preferential rate. Expenditures may result in significant revenue loss for the government. These include provisions like the earned income tax credits (EITC), the child tax credits (CTC), the deduction for employer health care contributions, and tax-advantaged saving plans.
The cost of a tax credit is not equal to the potential savings and revenue that could be raised by repealing the credit. Tax expenditure estimates don’t take into account the taxpayers’ behavior change and the interaction effects of the expenditure with other tax provisions. Several IRA credits are also scheduled to be paid over time. Clawing back the already-obligated credit is different from repealing or reforming them going forward. Option 1. Full Repeal of IRA green energy tax creditsWe estimate that repealing all of the green energy credits associated with the Inflation Reduction Act would raise $851 billion in the budget window 2025-2034. Table 1. Full Repeal of IRA Credits Would Raise Over $850 Billion in the Next Decade
10-Year Conventional Revenue Estimate, 2025-2034 (billions)
Source: Tax Foundation Taxes and Growth Model; author’s calculations based on EIA data; Treasury Tax Expenditures, FY2026.
Option 2. Targeting Specific Provisions
Short of full repeal, the obvious place to start is eliminating specific provisions. The primary (but not the only) goal of Inflation Reduction Act was to reduce greenhouse gas emissions. However, not all IRA credits are created equal: most modeling of the IRA shows the power sector provisions are the main drivers of emissions reduction, and are more cost-effective.
Accordingly, it would make sense to target provisions aimed at other sectors first. The EV tax credit has many problems. The majority of estimates show that inframarginal payments are a large part of the EV tax credits: people who would buy an electric vehicle even without an incentive. Other, smaller transportation credit, such as the sustainable aviation fuel credit, also have questionable climate benefits. Table 2. We estimate that this option would raise approximately $295 billion in the budget window. Repealing Transportation and Green Building Credits Would Raise Almost $300 Billion
10-Year Conventional Revenue Estimate, 2025-2034 (billions)
Source: Tax Foundation Taxes and Growth Model; author’s calculations based on EIA data; Treasury Tax Expenditures, FY2026.
Option 3. The Inflation Reduction Act is a perfect example of this approach. It has many built-in provisions that focus on union labor, it features geographic redistribution with bonus credits for green energy operations opening in designated regions, and to top it all off, it includes bonus credits for domestic content usage. It is a climate legislation that aims to reduce greenhouse gas emission. It has many built-in union labor provisions. It also features geographic redistribution with bonus credits to green energy operations opening up in designated regions. And to top it off, it includes bonuses for domestic content usage. The prevailing wage requirements and apprenticeship requirements are typically the most significant of these add-ons. These requirements increase the benefits of major provisions, such as the clean energy investment
tax credits. A tax credit is a provision which reduces the taxpayer’s final tax liability dollar-for-dollar. Tax credits are different from deductions and exclusions, which directly reduce the tax bill of the taxpayer rather than reducing taxable income.
We estimated how a stripped-down credit regime for electricity could look by setting up a new PTC. This replacement PTC would be a flat rate of 1,5 cents per kilowatt hour (in current dollars), with inflation adjusted annually. This replacement PTC would cover all electricity sources, including the new PTC. Existing facilities will continue to be eligible for their preexisting PTC. Facilities that are already under construction will have the choice of the IRA PTC and the replacement PTC. All new projects will be eligible for replacement PTC.
It will also replace the ITC, instead of having to choose between the ITC or the PTC. The PTC also has some efficiency benefits over the ITC. This was done partly for ease of calculation, but it is also a more efficient alternative. The ITC distorts incentives for production by subsidizing capital costs instead of electricity production directly. Reforming the PTC and ITC Could Raise Over $200 Billion in the Next Decade
10-Year Conventional Revenue Estimate, 2025-2034 (billions)
Source: Tax Foundation Taxes and Growth Model; author’s calculations based on EIA data; Treasury Tax Expenditures, FY2026. This option focuses on the main ITC & PTC. The principles of this reform can be applied to other IRA credits. The credit for clean hydrogen production is reduced by 80 per cent if taxpayers do not meet the requirements of prevailing wages and apprenticeships. The nuclear production credit will also be reduced by 80 per cent if taxpayers do not meet these requirements. The code would be simplified and tax revenue would increase by reducing the maximum credit rate and eliminating the labor rules for both the hydrogen and nuclear credits.
Option 4. Closer to Full IRA Reduction
We will also consider a more aggressive solution, which would include the repeal of the majority of credits in the IRA. This package would keep the carbon dioxide sequestration credit and nuclear power production credits untouched and would include the PTC replacement option discussed above. Table 4. Repeal of Most of the IRA Raises $746 Billion Over the Next Decade
10-Year Conventional Revenue Estimate, 2025-2034 (billions)
Source: Tax Foundation Taxes and Growth Model; author’s calculations based on EIA data; Treasury Tax Expenditures, FY2026. Ultimately, the IRA offers plenty of fat to cut, even if some members of Congress insist on partially or entirely preserving some major provisions.Notable Uncertainties
These estimates are based on projected costs of the EV credits released by the Treasury Department in November 2024, which assume that EPA tailpipe emissions regulations finalized in March 2024 under current law are in effect. The Trump administration EPA announced recently that it will review the tailpipe regulations, and plans to overturn them. However, the regulations were still in place at the time this article was written. If the EV tax credit was repealed, EV adoption and revenue would both fall. Our EV tax credit estimation does not include any gas tax revenue feedback. A decrease in EV adoption due to the repeal of the tax credit will result in a higher proportion of internal combustion engines, and therefore a higher
gastax. Gas tax is a term used to describe varying taxes levied at the federal and state level on gasoline to fund highway repair and maintenance as well as other government infrastructure projects. These taxes are imposed in several ways, including excise tax per gallon, excise tax imposed on wholesalers and general sales taxes which apply to the purchase gasoline.
revenue. In this respect, our modeling may underestimate the revenue effects of the policy change.
Several of the major tax credits in the IRA feature the option of elective or “direct pay,” which effectively makes them fully refundable. Tax-exempt organizations, such as nonprofits and state and local governments, can benefit from many electricity generation credits. Some credits are transferable: Transferability allows tax credit benefits to be transferred to another entity for cash in exchange for those who are not eligible for direct payment. This can help to circumvent restrictions like the limit on net operating losses. These options suggest that the costs of eligible credit may translate more closely to revenue. Our modeling may have underestimated the revenue effects of repeal. In this respect, our modeling may underestimate the revenue effects of repeal.
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