Scott Bessent, President-elect Donald Trump’s pick for Treasury Secretary, described the 2022 Inflation Reduction Act (IRA) as a “doomsday machine for the budget.” This is significant: guidance and implementation of the IRA are largely up to the Secretary of the Treasury, meaning Bessent will have significant control over the interpretation of the law early next year.
Bessent is also right. The IRA’s climate and energy sections with funding for reductions in emissions and air pollution, expanding rural development, and electric vehicle tax credits, were originally estimated to total $386 billion over ten years. After the bill’s passage, the Committee for a Responsible Federal Budget estimated that the IRA’s energy and climate policies would instead cost $660 billion through 2021; if a new EPA vehicle emissions rule is included, the cost will soar to over $1 trillion. In early 2023, a study from Penn Wharton Budget Model (PWBM) confirmed that the climate and energy provisions of the bill could cost $1.045 trillion in the same period.
Two changes to the tax credits for clean energy vehicles drive much of this increase. Before the IRA, the alternative fuel vehicle credit included a phaseout enacted in 2008 which qualified only the first 250,000 electric vehicles (EVs) sold for the tax credit. The IRA removes this clause, which was intended to end the credit once it was clear that EVs reached a degree of competitiveness with gas-powered vehicles. The IRA also requires manufacturers to perform final assembly in North America to be eligible for the credit. This policy will increase costs for consumers. A goof by the Biden Administration will also drive up costs for taxpayers: leased vehicles are inadvertently not included in the requirement, creating a loophole that allows leased vehicles to qualify for the credit regardless of where final assembly occurred.
As for the overall bill, the Congressional Budget Office originally estimated that the IRA would reduce the budget deficit by $58 billion over ten years even after directing substantial resources toward environmental policies, health care spending, prescription drug price regulation, and Internal Revenue Service (IRS) funding. Despite the funding boost, the IRS is far from reaching its projected tax collection and we recently graded them a C on closing the tax gap in the past year. The glacial pace of closing the tax gap and the revised energy tax credit estimate entirely wipe out any potential revenues from the IRA.
This $600 billion swing in IRA cost estimates is enormous, again driven largely by clean energy investment and production credits. These credits should face repeal with Scott Bessent at the helm of the Treasury. The restriction of the credits, which heavily favor solar and wind energy over other alternatives, leads to the government choosing winners and losers in what should be a dynamic, competitive market if climate advocates want to find cost-effective and efficient alternatives to fossil fuels. Before the election, 18 Republican House members signed a letter urging that IRA tax credits be kept, but they are a tempting target as Republican lawmakers look for ways to reduce spending ahead of extending the 2017 tax cuts.
The economy and inflation were the top issues for many Americans throughout the Biden Administration and at the ballot box. Many saw the election as a referendum on the high prices affecting their day-to-day lives leading up to November 5th. Despite the 2022 Inflation Reduction Act, high prices lingered and inflation persisted. The transition to the Trump presidency could therefore result in the rollback of some of the IRA’s costlier elements.