Senate Approves Inflation Reduction Act; House Action Expected on Friday
August 11, 2022
After months of intra-party talks, the Senate on August 7 advanced a major budget reconciliation bill – the Inflation Reduction Act of 2022 – that includes various climate change, renewable energy, tax, and health care-related provisions. The final package, which was negotiated by Majority Leader Chuck Schumer (D-NY) and Senator Joe Manchin (D-WV), was carefully crafted to be able to win support from all 50 members of the Senate Democratic caucus. In the end, the chamber cleared the bill along party lines, with Vice President Kamala Harris casting the tie-breaking vote. The House will return briefly from its August break to clear the measure on Friday.
At its core, the Inflation Reduction Act aims to reduce carbon emissions by roughly 40 percent by 2030. It would accomplish this feat by, among other things, providing nearly $370 billion for a range of tax credits to help stimulate adoption of clean energy technologies. The measure also includes a fee on oil and gas companies’ methane emissions and would dedicate $60 billion to low-income areas and minority communities that suffer disproportionately from environmental pollution.
Aside from the environmental provisions, the Inflation Reduction Act would allow Medicare to negotiate certain prescription drug prices and limit the program’s out-of-pocket co-pays to $2,000 annually. It also would extend for another three years the increased premium subsidies for Affordable Care Act coverage for approximately 13 million low- to moderate-income individuals who purchase coverage through a health exchange.
In addition, and prior to final passage in the Senate, a coalition of Western Democrats won inclusion of $4 billion in drought resiliency funding. The funding, which will be administered by the U.S. Bureau of Reclamation, is available to help compensate farmers, water districts, and others for voluntary water reductions. Pursuant to the legislation, it could also be used for voluntary system conservation projects that achieve verifiable reductions in the use of or demand for water supplies or projects that provide environmental benefits in the Lower Basin or Upper Basin of the Colorado River. Finally, federal dollars would be available for ecosystem and habitat restoration projects to address issues directly caused by drought in a river basin or inland water body.
On the revenue side of the ledger, the legislation would be fully offset through a combination of corporate tax changes, increased IRS enforcement, and Medicare prescription drug pricing reforms. At the request of Senator Kyrsten Sinema (D-AZ), a provision that would have changed the way private equity income is taxed was cut from the final package. In its place, Democrats added a 1 percent excise tax on stock buybacks. While a final cost analysis is not yet available, it’s anticipated that the measure would contribute $300 billion toward deficit reduction efforts.
To follow are select highlights of the Inflation Reduction Act:
Clean Energy Tax Credits
The agreement includes 10-year extensions of existing credits for wind and solar, as well as provisions for heat pumps, rooftop solar and standalone energy storage, such as batteries. The credits are tied to prevailing wage and domestic content requirements.
Domestic Clean Energy Manufacturing
The bill includes a five-year, $60 billion production tax credit that would send payments directly to companies involved in clean energy manufacturing. About half of the credits would flow to efforts to spur manufacturing for solar panels, wind turbines, batteries and critical minerals processing. About $10 billion would be dedicated to build clean technology manufacturing facilities.
Electric Vehicles
The Inflation Reduction Act includes a $7,500 rebate for new electric vehicles (EVs) and a $4,000 tax credit for used vehicles. To qualify for the credit, the final assembly of a vehicle must occur in North America. The measure would also require EVs to have batteries made with at least 40 percent minerals extracted or processed by a nation that is party to a U.S. free trade agreement. The critical minerals content requirement for batteries would increase to 80 percent by 2027. In addition, the package would set aside financing and credits to promote EV manufacturing. It also calls for $2 billion in grants to help convert existing auto manufacturing factories into EV production facilities and $20 billion in loans for new clean vehicle manufacturing sites.
The income limit to receive an EV tax credit would be $300,000 for a couple, $225,000 for a head of household, and $150,000 for any other filer. In addition, vehicles eligible for a tax credit would need to be below a certain price. The highest retail price eligible for a tax credit would be $80,000 for vans, SUVs and pickup trucks, and $55,000 for cars.
Environmental Justice
The package includes $60 billion for various environmental justice initiatives. The proposed funding includes $3 billion in block grants to address environmental health problems, $3 billion for creating more access to transportation, $3 billion for improving air quality near ports, and $1 billion for clean heavy-duty vehicles (buses, garbage trucks, etc.).
Drinking Water and Endangered Species
The legislation would provide $550 million in grants and other financial support for disadvantaged communities to help them access potable drinking water supplies. The bill also includes funding for the U. S. Fish and Wildlife Services (FWS) to develop and update Endangered Species Act Recovery Plans, address the threat of invasive species, and increase the resiliency and capacity of habitats and infrastructure to withstand climate-induced weather events.
Methane Fee
Under the bill, oil and gas companies that emit more than 25,000 metric tons of carbon dioxide annually would be fined if their methane leakage rate exceeds a certain threshold. The fee would escalate over time from $900 per metric ton of emissions to $1,500 beginning in 2027. The package also provides over $1.5 billion to help companies reduce methane emissions, such as providing technical assistance to improve greenhouse gas reporting, shut-in wells, and deploying methane-reduction equipment and processes. In addition, the Inflation Reduction Act would let companies that comply with any future federal methane rules avoid paying the fee, so long as those regulations achieve the same amount of emissions reductions.
Offshore Wind
The package includes new measures that would tie offshore wind leasing to previous auctions for oil and gas. The bill would put in place a 10-year window in which a lease for offshore wind development could not be issued unless an oil and gas lease sale has been held in the year prior and is not less than 60 million acres. It also would withdraw the Trump administration’s moratorium on offshore wind leasing in the southeastern U.S. and eastern Gulf of Mexico.
Forestry
The forestry subtitle of the bill would allocate $2.15 billion for National Forest System restoration and fuel-reduction projects, $550 million for grant programs targeted to non-federal forest landowners, and $2.2 billion for state and private forestry conservation programs.
Defense Production Act
The legislation includes $500 million in funding to support President Biden’s use of the Defense Production Act to produce heat pumps and spur critical minerals processing projects.
Green Bank
The agreement includes $27 billion for a clean energy technology accelerator to support deployment of emission-reduction technologies, especially in disadvantaged communities. The program resembles the national green bank that had emerged in earlier iterations of the bill.