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November 2024
Reports of the Inflation Reduction Act’s Death are Greatly Exaggerated
Reports of the Inflation Reduction Act’s Death are Greatly Exaggerated
While the election outcome has understandably sparked concern about the fate of the Inflation Reduction Act (“IRA”) given President-Elect Trump’s previous calls to eliminate it, a full repeal or major overhaul is highly unlikely.
Takeaways
In an interview with CNBC, U.S. House Speaker Mike Johnson was clear that the IRA is law and Republicans had no intention of scrapping it. In his words, “You’ve got to use a scalpel and not a sledgehammer, because there’s a few provisions in there that have helped overall.”
There are several reasons to believe this is exactly how things will play out:
- The legislation has produced substantial benefits, most notably in job creation and energy growth – particularly in Republican states. Consequently, it has garnered significant bipartisan support.
- Energy independence and a strong economy are high priorities for Trump – but much higher priorities exist.
- Repealing laws is an arduous and often contentious process. It is more likely that new legislation will be introduced to modify or replace specific elements of the existing law, such as eliminating the EV tax credit.
Finally, it’s important to note that safe harbors protect developers and their investors from losing tax credits for projects initiated before a policy change. As a result, projects that begin construction in 2025 will remain eligible for applicable tax credits for 4 years.1 Developers are already taking steps to safe harbor their projections in development by purchasing and warehousing project equipment and materials.
The Inflation Reduction Act is Here to Stay
The effort to diversify the nation’s energy sources is not new, nor is it exclusively a Democrat initiative. Renewable energy tax credits have been introduced in various forms under both Democratic and Republican administrations, beginning with George W. Bush in 2007.
The legislation has produced substantial benefits, garnering significant bipartisan support.
In its first two years, the Inflation Reduction Act delivered on many of the expected promises2:
- 330K new clean energy jobs
- $265B announced new clean energy investments
- $8.4B in energy-related savings to 3.4M families from IRA consumer tax credits
States Demand Renewable Energy and Red States Have Benefitted Disproportionally
Between 2019 and 2023, 26 states enacted Clean Energy mandates, reflecting strong constituent demand and likely influencing Congressional actions.
Among the states with significant solar development and deployment, six of the top seven are predominantly “Red” states3 (Texas, Florida, North Carolina, Arizona, Nevada, and Georgia).
Furthermore, according to the nonpartisan policy advocate, E2, nearly 60% of announced new clean energy projects, representing the vast majority of investments and 68% of jobs, are located in Republican-led districts.4
Republicans are Vocal Supporters…
In their August 6th letter to Speaker Johnson, a dozen and a half Republican Congressmen urged support for energy tax credits, saying they have, “spurred innovation, incentivized investment, and created good jobs in many parts of the country - including many districts represented by members of our conference.”
Energy independence is a high priority for Trump – but much higher priorities exist.
Although President-Elect Trump has advocated for traditional fossil fuels, he is unlikely to achieve long-term energy independence without relying on clean energy. Aside from the economic boost an investment in the renewables generates, supporting the sector addresses several key issues important to the Trump administration:
- It is domestically produced and abundant
- Renewables increase energy security by diversifying the energy mix and reducing vulnerabilities to geopolitical risk and supply disruptions
- Unlike fossil fuels, costs to produce clean energy are relatively stable and predictable
- Renewables are virtually inexhaustible, making them viable, sustainable long-term energy sources
Considering the anticipated growth in electricity demand from electrification and technological advancements, like artificial intelligence and blockchain, the U.S. cannot afford to take a step backwards when it comes to energy production. According to the consultancy, ICF5, electricity demand in the U.S. is projected to grow 9% by 2028, potentially leading to a nearly 20% increase in electricity costs.
All that said, repealing the IRA is not as high on Trump’s priority list as other initiatives, many of which will require significant funding. Chief among these is the extension of his signature policy, the Tax Cuts and Jobs Act (TCJA). Given corporations’ reliance on renewable energy tax credits to manage their tax liabilities, any effort to eliminate these credits would likely prove counterproductive.
Repealing laws is an arduous, often contentious process.
The hurdles to fully removing a law are substantial. If it were easy the Biden Administration likely would have repealed the TCJA and raised corporate taxes as he pledged to do in his 2020 election campaign.
The process:
Regular Legislative Process (60 votes): Fully repealing the IRA requires 60 votes in the Senate to achieve cloture, ending debate and overcoming a filibuster.6 Achieving this would require significant bipartisan support, as Republicans will only control 53 seats post-election.
Simple Majority (51 votes): Although the law cannot be fully repealed with a simple majority, budget-related changes can be made through the budget reconciliation process. Since budget-related laws and amendments are not subject to the filibuster, the Senate can make targeted adjustments.
Elements of the IRA most vulnerable to elimination or major modification under the Trump administration primarily stem from ideological opposition and fiscal concerns. Provisions such as EV and wind incentives, hydrogen production funding, and IRS enforcement initiatives face scrutiny due to their association with Democratic climate policies, the negative impact they have on the fossil fuel industry, and a general perception of government overreach.
Investment Tax Credit investments have safe harbor protection.
While Trump remains a wildcard in potentially unwinding the past administration’s policies, we are confident that the major elements of the Inflation Reduction Act will remain intact.
However, if major revisions to the IRA do occur, the Treasury Department and IRS have a long-standing policy, extended multiple times, of providing a Continuity Safe Harbor for projects under construction, enabling investors to receive applicable tax credits, even if these projects are not placed in service for several years.1
The policy allows developers to meet either of two safe harbor tests demonstrating that construction of a facility has begun and is ongoing7:
- The “Physical Work Test” – establishing that physical work of a significant nature has begun; or the
- “Five Percent Safe Harbor Test” – at least 5% of the project’s costs have been incurred.
Bottom line, the Inflation Reduction Act's resilience reflects its broad economic and bipartisan support, signaling that clean energy investments are poised to remain a cornerstone of U.S. energy policy regardless of political shifts.
1Internal Revenue Service, Notice 2021-41: Beginning of Construction for the Renewable Electricity Production Tax Credit and Energy Investment Tax Credit, June 29, 2021.
2The White House, "Fact Sheet: Two Years In, the Inflation Reduction Act Is Lowering Costs for Millions of Americans, Tackling the Climate Crisis, and Creating Jobs," Statements and Releases, August 16, 2024.
3Solar Energy Industries Association, "Solar State by State."
4Environmental Entrepreneurs (E2), Clean Economy Works: Two-Year Review 2024, August 14, 2024.
5ICF, "ICF Report Projects 9% Surge in US Electricity Demand by 2028," ICF Newsroom, September 12, 2024.
6U.S. Senate, “Filibuster and Cloture,” Senate.gov.
7"Treasury, IRS Extend Safe Harbor for Renewable Energy Projects," Internal Revenue Service, June 29, 2021.
Disclaimer: The information provided in this article is for general informational purposes only and should not be construed as legal, tax, or investment advice. Readers are encouraged to consult with their own legal, tax, and investment professionals before making any decisions based on the content of this article. The authors and publishers are not responsible for any actions taken based on the information provided herein, and the opinions expressed herein are solely that of the authors.