3 things about the IRA every government stakeholder should know

Happy Friday! This week, I watched a panel discussion on the Inflation Reduction Act (IRA) that opened my eyes to a few key facts that I thought everyone should know. You can view the full recording here (they haven’t asked me to promote this; I just thought it was super interesting). Keep scrolling to get the quick take on new tax credits, changes to clean energy financing, set-asides for coal county, and more.

Transferable and direct pay tax credits are a big deal to local governments

A number of the tax credits have a “direct pay” option, which works kind of like a rebate for governments and other entities that don’t owe federal taxes. Projects where direct pay can be used include electric vehicle fleets, building clean energy facilities, EV charging stations, carbon capture facilities, and others.

Two examples 

• A utility issues tax-exempt bonds to finance a clean energy capital project and the federal government will cover up to 15% of the annual debt payments (not including interest).

• A locality purchases an all-electric vehicle fleet and receives a rebate of up to 30% after filing a tax return. 

Sarah Gimont, associate legislative director for environment, energy and land use policy at the National Association of Counties, called this option a “game changer” because it opens up more financing opportunities for local governments. 

Learn more

• NLC’s explainer on direct credits

• IRA provisions and incentives for local governments (Holland & Knight)

• BlueGreen Alliance’s user guide to the IRA

Justin Marlowe, a public finance expert at the University of Chicago (and podcaster extraordinaire), added that the IRA’s clean energy tax credits are transferable: If an eligible property changes hands the tax credit comes with it. For example, a private developer can receive tax credits to build a solar farm. The developer can sell that to a local government entity, which can then turn those tax credits into a direct pay credit.

“I would argue this has even more significant implications for where the municipal finance industry goes from here,” Marlowe said.

But be careful: The wide availability of tax credits and direct pay in the IRA is on a scale never done before by the federal government and that has folks pretty excited about the possibilities. But that excitement is tempered by remembering what happened the last time the feds offered to subsidize muni market bond issuances.

Build America Bonds, or BABs, were created in response to the Great Recession and intended for infrastructure projects. BABs were taxable, making it more expensive for issuers, but the federal government defrayed that extra cost by covering about one-third of the interest payments. That is, until sequestration hit in 2013 and the subsidy was slashed, leaving governments on the hook to make up the difference.

Marlowe said that’s still a concern but if enough issuers and private sector partners use the financing structure, that could help protect it from Congressional meddling.

Localities have some serious FOMO

Between the Infrastructure Investment and Jobs Act (IIJA) and the IRA, there is a LOT of federal money out there and dozens of new programs to understand. It’s no wonder then that many folks have a Fear of Missing Out.