The price tag of 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 covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. Reduction Act’s green energy tax credits is much higher than we thought. This week, the Joint Committee on Taxation (JCT)The Joint Committee on Taxation (JCT) is a nonpartisan congressional committee in the United States that assists both the House and Senate with tax legislation. The JCT is chaired, on a rotation, by the Chair of the Senate Finance Committee and the Chairman of the House Ways and Means Committee. provided a “very preliminary” new score of the credits, pegging the cost at $663 billion from 2023 to 2033. That’s up from $570 billion when scored in April (which excluded the electric vehicle credits) and more than double JCT’s original estimate last August of $270 billion over 10 years. Among other things, this indicates the Inflation Reduction Act does not reduce deficits after all.
The Inflation Reduction Act (IRA) has meant many things to many people. Last August, when it was being debated in Congress, it was sold as a way to ease inflation by reducing deficits. Initially, the Congressional Budget Office (CBO)The Congressional Budget Office (CBO) provides nonpartisan analysis to the U.S. Congress on federal economic and budgetary matters. and JCT did find that it would reduce deficits by around $260 billion over 10 years (about 1 percent of the $18 trillion of deficits projected to occur under current law over the same period). Soon after enactment, the administration began marketing it as the “most significant climate legislation in U.S. history” because of the extraordinary generosity of about two dozen tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s aimed at green energy technologies.
The Biden administration’s efforts to pitch the IRA as a big “investment” in climate were always at odds with the deficit reduction idea. Over time, it became apparent that certain features of the credits could balloon their budgetary cost. For instance, the bill allows transferability between taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. payers to allow the credits to be fully monetized, and loose legislative language has allowed the Biden administration’s Treasury Department to expand eligibility and use through regulatory guidance.
For example, a recent Treasury ruling allows taxpayers to avoid the legislation’s eligibility limits for the $7,500 electric vehicle (EV) tax credits. Congress designed the rules to prevent people earning more than $300,000 from getting the credits and further limited them to apply only to cars with a sales price below $55,000 and SUVs and trucks with a sales price below $80,000. Treasury ruled that these, and other limits regarding domestic content requirements, don’t apply to leased vehicles. Unsurprisingly, leasing has now grown to about 34 percent of EV sales, compared to about 7 percent last September.
Comparing JCT’s changing revenue estimates for each of the credits, Martin Sullivan, Chief Economist at Tax Analysts, finds that the score for the EV credits grew 524 percent, from $11 billion in the original estimate for the period 2023 to 2031 to $69 billion over the same period. Other credits that also grew substantially are the credit for carbon oxide sequestration (439 percent), the advanced manufacturing production credit (333 percent), and the Section 48 investment credit (330 percent). In total, the cost of the IRA credits grew 103 percent for the period 2023 to 2031. JCT attributes the cost growth to several factors including Treasury’s expansive guidance as well as increases in anticipated production capacity for batteries and renewable energy.
Though the JCT score of the credits has more than doubled, it remains lower than many other estimates from outside experts. Researchers at Brookings Institution put the cost of the credits closer to $1 trillion over 10 years. Those estimates indicate the IRA bill as a whole increases deficits by several hundred billion over 10 years. It’s probably time for a new score of the entire IRA from JCT and CBO so lawmakers and taxpayers understand what we’ve gotten ourselves into.
Here are a few things we know about the Inflation Reduction Act today:
- It doesn’t reduce deficits and may substantially increase deficits.
- The energy credits drive the out-of-control cost of the IRA, showing the dangers of this kind of open-ended (non)budgeting.
- The energy credits are a boon for wealthy individuals with a preference for climate-oriented luxury goods, including expensive EVs and solar panels.
- The energy credits also benefit large corporations. For instance, the Joint Committee on Taxation recently analyzed two of the business credits that were extended as part of the IRA, finding that corporations with gross receipts of more than $25 billion in 2020 received about $3.7 billion, or 53 percent, of the Section 48 Energy Credit and about $4.6 billion, or 62 percent, of the Section 45 Credit for Electricity Produced from Certain Renewable Resources.
- Distributional analysis of the energy credits indicates high-income earners are the big winners. For example, based on analysis by the Tax Policy Center that allocates the business credits to shareholders and workers, and using updated revenue estimates, Jason Furman finds that the credits will provide a benefit of more than $11,000 for the top 1 percent of earners in 2027, raising their after-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize after-tax income. s by 0.5 percent. In contrast, the bottom quintile of earners receives a benefit of less than $100, raising their after-tax incomes by 0.3 percent.
- The energy credits add to the tax code’s complexity, increasing confusion and compliance costs for taxpayers and administrative challenges for the IRS.
- The tax hikes in the IRA, including the book minimum tax and stock buyback tax, were designed to pay for some of the costs of expanded credits, but are introducing a variety of uncertainties and compliance costs for business taxpayers. The book minimum tax suffers from many flaws, including the fact that book incomeBook income is the amount of income corporations publicly report on their financial statements to shareholders. This measure is useful for assessing the financial health of a business but often does not reflect economic reality and can result in a firm appearing profitable while paying little or no income tax. is not a well-defined tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. , and so it requires voluminous regulatory guidance and taxpayer comments to try and sort out how it could possibly work. Meanwhile, the guidance continues to roll out even as the new tax liabilities are due, and many outstanding issues, such as how small partnerships are affected, will probably need to be settled in the courts. The stock buyback tax is another new idea in taxation, but not a good one. Ostensibly aimed at perceived problems in corporate finance, in practice it is also proving to be a way the administration can selectively punish certain types of firms and create additional compliance costs.
One unanswered question about the Inflation Reduction Act green energy tax credits is whether they would benefit taxpayers at all. Many countries are adopting the global minimum tax rules, and those rules allow countries to apply top-up taxes when a company has an effective tax rate below 15 percent, even if the low-tax income is beyond the enforcing country’s borders. If the credits are included in that calculation, then their value could be directly offset by tax increases in countries that have adopted the minimum tax. So, the U.S. would be giving a credit while another country gets more tax revenue through the top-up tax.
So far, it seems that at least some of the IRA credits will trigger foreign top-ups.
Repealing the Inflation Reduction Act green energy tax credits would be a step in the right direction as it would constitute a real improvement in the tax code while substantially reducing deficits. If lawmakers want to address climate change, there are proven ways to do that in a more fiscally responsible manner by raising the cost of carbon emissions through some form of carbon pricing, such as a carbon taxA carbon tax is levied on the carbon content of fossil fuels. The term can also refer to taxing other types of greenhouse gas emissions, such as methane. A carbon tax puts a price on those emissions to encourage consumers, businesses, and governments to produce less of them. . Carbon pricing is a standard and effective approach used in 47 countries, and it generates substantial tax revenues.
While lawmakers have successfully lifted the debt ceiling and contained short-term deficits to a degree, there is an ongoing debt crisis that will build over the next few years due to unsustainable budgeting, including spending through the tax code and entitlement spending left on auto-pilot. Resolving the debt crisis will require our politicians to put political slogans aside and be straight with taxpayers about the drivers of the debt and proven ways to effectively address it. That includes recognizing when past legislation, such as the Inflation Reduction Act green energy tax credits, has simply become too costly to continue.
Note: This blog post, originally published on April 26, 2023, has been updated on June 7, 2023 to reflect updated JCT projections.
Stay informed on the tax policies impacting you.
Subscribe to get insights from our trusted experts delivered straight to your inbox.Subscribe