Four Paths for Inflation Reduction Act Reforms

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 (IRA) introduced a series of new targeted 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. breaks, many of which seem to be much more expensive than originally forecasted. Understandably, repealing these subsidies is a key option for policymakers looking to pay to extend the expiring broader tax cuts passed in the Tax Cuts and Jobs Act (TCJA).

At the same time, several Republican lawmakers have voiced support for some IRA provisions, and full repeal may prove difficult. House Speaker Mike Johnson (R-LA) described the likely approach to IRA reform as “somewhere between a scalpel and a sledgehammer.” That balance can be struck by taking a sledgehammer to policies that don’t work and a scalpel to those that do.

Cost Estimates versus Revenue Estimates

IRA credit cost estimates vary widely. In the most recent Treasury expenditures report, IRA green credits are projected to cost $1.16 trillion from 2025 to 2034, owing to $830 billion in lost revenue and $330 billion in outlays. Those estimates include some costs from green credit policies that predate the IRA. Other estimates have placed the credit costs even higher, largely owing to different assumptions around technology adoption and associated regulation. A recent Cato Institute paper placed the upper bound of the IRA’s cost over the next 10 years at $1.97 trillion.

However, the tax expenditureTax expenditures are a departure from the “normal” tax code that lower the tax burden of individuals or businesses, through an exemption, deduction, credit, or preferential rate. Expenditures can result in significant revenue losses to the government and include provisions such as the earned income tax credit (EITC), child tax credit (CTC), deduction for employer health-care contributions, and tax-advantaged savings plans. cost of a credit is not the same as the potential savings or revenue raised from repealing it. Tax expenditure estimates do not consider taxpayers’ behavioral change, and they do not consider the interaction effects between the expenditure and other tax provisions. Additionally, specific to a couple IRA credits, several are scheduled to be paid out over time. Clawing back those already-obligated credits is a different proposition from just repealing or reforming the credits going forward. Additional uncertainties associated with these estimates are discussed ahead.

Option 1. Full Repeal of IRA Green Energy Tax Credits

We estimate repealing all the green energy tax credits associated with the Inflation Reduction Act (IRA) would raise $851 billion over the 2025 to 2034 budget window.

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 (although not only) goal of the Inflation Reduction Act is reducing 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 credits have numerous problems. Most estimates show a high degree of inframarginal payments: credits awarded to people who would purchase an electric vehicle without an incentive. Other, smaller transportation credits, such as the credit for sustainable aviation fuel, have dubious climate benefits as well.

We looked at an option repealing the tax credits for electric vehicles, refueling property, and clean fuel production, as well as the tax credits aimed at the residential sector. We estimate this option would raise $295 billion over the budget window.

Table 2. 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. Throwing Out the Everything Bagel

In 2023, The New York Times columnist Ezra Klein wrote a famous column called “The Problem with Everything Bagel Liberalism.” He defines “Everything Bagel Liberalism” as a policymaking approach that attempts to address every issue all at once.

The Inflation Reduction Act perfectly exemplifies this approach. It’s a climate law meant to reduce greenhouse gas emissions; it has many built-in provisions focused 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.

If repealing the IRA is too difficult, a great next-best step would be gutting this “Everything Bagel” approach: repealing many of the add-on subsidies attached to the clean energy provisions and leaving the core credits in place to do their jobs. Of these add-ons, prevailing wage and apprenticeship requirements are usually the most substantial. Meeting these requirements increases the benefits of major provisions such as the clean electricity investment 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. (ITC) and clean electricity production tax credit (PTC) by five times.

We estimated what a stripped-down electricity credit regime could look like by setting up a replacement PTC. Instead of the rate schedule of the existing PTC, this replacement PTC would have a flat rate of 1.5 cents per kilowatt-hour (in current dollars), adjusted for inflation annually. This replacement PTC would cover the same electricity sources as the new PTC. Facilities already in operation would continue to be eligible for the preexisting PTC. Facilities already under construction would have the option of either the IRA PTC or the replacement PTC, and all new projects would be eligible for the replacement PTC.

It would also replace the ITC at the same time, instead of retaining the choice between the ITC and the PTC. This was partially done for ease of estimation, but the PTC has some efficiency advantages over the ITC as well. By subsidizing one type of cost (capital cost) instead of electricity production directly, the ITC distorts production incentives in favor of projects with higher capital costs.

We estimate this option would raise $207 billion over the budget window.

Table 3. 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 is focused on the main ITC and PTC. However, the principles of this reform could be applied to several other IRA credits. The clean hydrogen production credit is cut by 80 percent unless taxpayers meet prevailing wage and apprenticeship requirements, while the nuclear production credit is cut by 80 percent if taxpayers don’t meet prevailing wage requirements. Reducing the maximum potential credit rate while eliminating these labor rules for the hydrogen and nuclear credits as well would simplify the code and increase tax revenue.

Option 4. Closer to Full IRA Repeal

We also consider a more aggressive option, featuring repeal of most of the credits in the IRA. This package would leave the nuclear power production credit and the carbon oxide sequestration credit untouched, and it would include the replacement PTC option discussed above. It would repeal the transportation and building-related credits from the first option as well as the advanced manufacturing production credit, the advanced energy property credit, and the clean hydrogen credit.

We estimate this option would raise $746 billion over the budget window.

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 has recently announced a review of the tailpipe regulations and intends to overturn them, but the regulations are still in effect at the time of writing. If repealed, EV adoption would likely fall, as would the revenue lost from the EV tax credits and conversely the revenue gained from repealing them. In this respect, our modeling may overestimate the revenue effects of the policy change.

Our EV tax credit estimate does not feature any gas tax revenue feedback. A decline in EV adoption from repealing the tax credit would mean a higher relative share of internal combustion engine cars, and accordingly higher gas taxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of 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. For many credits related to electricity generation, that means tax-exempt organizations such as nonprofits or state and local governments can receive the same incentive that businesses can. Transferability is available for some credits: transferability allows entities not eligible for direct pay to transfer their tax credit benefits to another entity in exchange for cash, which can help circumvent some restrictions such as limits to net operating losses (NOLs). These options suggest the costs of eligible credits may translate more closely into revenue to be gained. However, apart from the EV credits, we mostly modeled outlays as analogous to other corporate tax expenditures and subjected them to the same interaction effects. In this respect, our modeling may underestimate the revenue effects of repeal.

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