The Inflation Reduction Act: Provisions and Incentives for Local Governments

President Joe Biden signed the Inflation Reduction Act of 2022 (IRA) into law on Aug. 16, 2022, following its passage along party lines in the U.S. Senate and House of Representatives. The comprehensive legislation is the result of many months of negotiations among Democrats to advance some of President Biden's highest policy priorities.

The IRA will reduce the deficit and make major investments in healthcare, domestic energy production and manufacturing, and climate change. This Holland & Knight alert breaks down some of the IRA provisions and incentives that will benefit local governments across the nation, with a comparison to similar programs offered by the Infrastructure Investment and Jobs Act (IIJA).

Funding Opportunities

U.S. Forest Service (USFS)

1. State and Private Forestry Conservation Programs ($2.2 billion)
1. The IRA will provide $700 million for the Forest Legacy Program (FLP) to provide grants to states to acquire land and interests in land.
2. The IRA will provide $1.5 billion for the Urban and Community Forestry Assistance Program, funding multiyear grants to state agencies, local governments, tribes or nonprofits for tree planting.

U.S. Environmental Protection Agency (EPA)

1. Greenhouse Gas Reduction Fund ($27 billion)
1. The IRA will provide $27 billion to establish a new Greenhouse Gas Reduction (GHG) Fund to invest in nonprofit, state and local financing institutions designed to rapidly deploy low- and zero-emission technologies by leveraging investment from the private sector. Projects funded under this program must reduce air pollution by reduction or avoidance of GHGs.
2. The IRA requires that least 40 percent of benefits go to low-income and disadvantaged communities to deploy or benefit from zero-emission technologies, including distributed technologies on residential rooftops. Direct investments are prioritized for projects that would otherwise lack access to financing and that can ensure continued operability by monetizing repayments and revenues for other financial assistance.
2. Clean Heavy-Duty Vehicles ($1 billion)
1. IIJA: EPA Clean School Bus Program: $5 billion
2. The IRA will provide $1 billion to establish a program to make grant and rebates to states, local governments and nonprofit school transportation associations to replace Class 6 and Class 7 heavy-duty vehicles with zero-emission vehicles.
3. Funding could also be used to purchase, install, operate and maintain the infrastructure needed to charge, fuel or maintain zero-emission vehicles; for the workforce development and training to support the maintenance, charging, fueling and operation of the zero-emission vehicles; or to plan and provide technical assistance to support zero-emission vehicle adoption and deployment.
4. The bill requires that 40 percent of funding ($400 million) be directed to recipients proposing to replace eligible heavy-duty vehicles serving communities located in nonattainment areas (i.e., areas with high air pollution).
3. Grants to Reduce Air Pollution at Ports ($3 billion)
1. IIJA: DOT Reduction of Truck Emissions at Port Facilities: $400 million
2. IIJA: DOT/MARAD: Port Infrastructure Development Program: $2.25 billion
3. The IRA will provide $3 billion to establish a program to award grants and rebates for the purchase and installation of zero-emission equipment and technology at ports as well as the development of climate action plans at ports.
4. Eligible funding recipients are a port authority; a state, regional, local or tribal agency with authority over a port authority; or an air pollution control agency. Private entities may apply in partnership with the aforementioned eligible recipients.
5. The bill allocates 25 percent of the funding ($750,000) for investments made at ports in nonattainment areas.
4. Climate Pollution Reduction Grants ($5 billion)
1. IIJA: DOT Carbon Reduction (formula): $6.419 million
2. The IRA will provide $5 billion as follows:
1. $250 million for grants for the costs of developing plans to reduce GHG air pollution and directs the EPA to make such a grant to at least one state, air pollution control agency, municipality or tribe in each state. Each plan must include programs, policies, measures and projects that will achieve GHG air pollution reduction.
2. $4.75 billion for the EPA to competitively award grants to implement GHG air pollution reduction plans. To apply for a grant, applicants must include information regarding the projected reduction of GHG air pollution reductions, including in low-income and disadvantaged communities in its plan.
5. Low-Emissions Electricity Program ($87 million)
1. The IRA will provide $87 million to EPA via the following investments:
1. $17 million to educate consumers on GHG emissions that result from domestic electricity generation and use
2. $17 million to educate and provide technical assistance to low-income and disadvantaged communities on GHG emissions that result from domestic electricity generation and use
3. $17 million to educate and provide technical assistance to industry on GHG emissions that result from domestic electricity generation and use
4. $17 million to educate and provide technical assistance to state, tribal and local governments on GHG emissions that result from domestic electricity generation and use
5. $1 million to evaluate GHG emission reductions anticipated to occur over the next 10 years as a result from the aforementioned education initiatives
6. $18 million to ensure the assessed reductions are achieved
6. Environmental and Climate Justice Block Grants ($3 billion)
1. The IRA will provide $3 billion to establish a program to provide grants that invest in community-led projects in disadvantaged communities and community capacity building centers to address disproportionate environmental and public health harms related to pollution and climate change.
2. Eligible funding recipients will be community-based nonprofits or organizations, or a partnership between community-based nonprofit organizations and a tribe, a local government or an institution of higher education.
3. Eligible activities include:
1. community-led air and other air pollution monitoring, prevention and remediation, investments in low- and zero-emission and resilient technologies and workforce development that help reduce GHG emissions and other air pollutants
2. mitigating climate and health risks from urban heat islands, extreme heat, wood heater emissions and wildfire events
3. climate resiliency and adaptation
4. reducing indoor toxics and indoor air pollution
5. facilitating engagement of disadvantaged communities in state and federal public processes
7. Greenhouse Gas and Zero-Emission Standards for Mobile Sources: $5 million for EPA to provide grants to states to adopt and implement low- and zero-emission standards for mobile sources.
8. Funding for Enforcement Technology and Public Information ($25 million): The IRA will provide $25 million, of which $18 million is to update EPA's Integrated Compliance Information System (ICIS) and other technology infrastructure; $3 million for grants to states, tribes and air pollution control agencies to update their systems; and $4 million to acquire and update inspection software used by EPA, states, tribes and air pollution control agencies.

U.S. Department of Energy (DOE)

1. Assistance of Latest and Zero Building Energy Code Adoption ($1 billion)
1. IIJA: DOE Building Codes Implementation for Efficiency and Resilience: $225 million
2. IIJA: DOE Energy Efficiency Revolving Loan Fund Capitalization Grant Program: $250 million
3. The IRA will provide $1 billion to support state and local governments to adopt updated building codes, broken down as follows:
1. $330 million to DOE to support states and local communities to adopt updated building energy codes for residential and commercial buildings, or to implement a plan to achieve full compliance, including training and enforcement programs. Residential buildings must meet or exceed the 2021 International Energy Conservation Code (IECC) or achieve equivalent or greater energy savings. Commercial buildings must meet or exceed the ANSI/ASHRAE/IES Standard 90.1-2019 or achieve equivalent or greater energy savings.
2. $670 million for DOE to support grants for states and local governments to adopt building codes that meet or exceed zero energy provisions in the 2021 IECC or an equivalent stretch code and implement a plan to achieve full compliance, including training and enforcement
2. Grants to Facilitate the Siting of Interstate Electricity Transmission Lines ($760 million)
1. IIJA: DOE Preventing Outages and Enhancing the Resilience of the Electric Grid Grants: $5 billion
2. IIJA: DOE State Energy Program: $500 million
1. The IRA will provide $760 million to issue grants to siting authorities, including state, local or tribal governmental entities, for the purpose of:
1. studying and analyzing the impacts of covered transmission projects
2. examining up to three alternate transmission siting corridors participating in regulatory proceedings
3. economic development activities for communities that may be affected by the construction and operation of a covered transmission project
2. Transmission lines must be high-voltage interstate or offshore electricity transmission lines, proposed to be constructed and to operate at least 275 kilovolts (kV) of alternating or direct current (or 200 kV for offshore alternating or direct current), and must have indicated intent to apply for regulatory approval. To receive a grant, the siting authority must agree to reach a final decision on the application no later than two years after the grant is authorized. Cost share is 50 percent.

U.S. Department of Transportation (DOT)

1. Neighborhood Access and Equity Grant Program ($3 billion)
1. IIJA: DOT Reconnecting Communities: $1 billion
2. The IRA will provide $3 billion to the Federal Highway Administration (FHWA) to support neighborhood equity, safety and affordable transportation access with competitive grants to reconnect communities divided by existing infrastructure barriers, mitigate negative impacts of transportation facilities or construction projects on disadvantaged or underserved communities; and support equitable transportation planning and community engagement activities.
3. Eligible funding recipients are a state, unit of local government or metropolitan planning organization (MPOs).
2. Low-Carbon Transportation Materials Grants ($2 billion): The IRA will provide $2 billion to FHWA to reimburse or provide incentives to state, local governments and MPOs for the use of low-embodied carbon construction materials and products in projects.
3. Alternative Fuel and Low-Emission Aviation Technology Program ($300 million)
1. The IRA will provide $300 million to establish a competitive grant program for projects that develop, demonstrate or apply low-emission aviation technologies; or produce, transport, blend or store sustainable aviation fuels (SAF), including:
1. $244.53 million for production, transportation, blending and storage of SAF
2. $46.53 million for low-emission aviation technologies
3. $6 million for administration and oversight
2. Eligible entities include states or local governments; air carriers; airports higher education  research institutions; entities that produce, transport, blend or store SAF in the U.S.; and entities engaged in research, development and demonstration of low-emission aviation technologies or nonprofits. Cost share is 25 percent for entities except small hub or nonhub airports, for whom the cost share is 10 percent.
3. DOT must consider
   1. the capacity for the entity to increase domestic production of SAF
   2. projected GHG emissions on a lifecycle basis
   3. job creation and supply chain partnership opportunity
   4. for SAF, GHG emissions on a life-cycle basis, including feedstock and fuel production as well as direct and indirect land use change (must demonstrate at least a 50 percent GHG reduction utilizing either GREET or ICAO models)
   5. benefits of ensuring a diversity of feedstocks for SAF, including the use of waste carbon oxides and direct air capture
4. Directs DOT to adopt a Life Cycle Analysis (LCA) model for GHG emissions within two years of bill enactment.
4. Environmental Review Implementation Funds ($100 million): The IRA will provide $100 million to facilitate the development and review of documents for the environmental review process for proposed projects for state, local governments and MPOs.

U.S. Department of Commerce/National Oceanic and Atmospheric Administration (NOAA)

1. NOAA – Investing in Coastal Communities and Climate Resilience ($2.6 billion)
1. IIJA: NOAA Coastal Habitat Restoration and Resilience Grants for Underserved Communities: $10 million
2. The IRA will provide $2.6 billion for NOAA for conservation, restoration and protection of coastal and marine habitats and resources, including fisheries, to prepare for extreme storms and climate change effects, as well as for projects that support natural resources to sustain coastal and marine resource dependent communities. Funds may take the form of grants, cooperative agreements or technical assistance to coastal states, the District of Columbia, tribal governments, nonprofits, local governments and higher education institutes.

U.S. Department of Housing and Urban Development (HUD)

1. Improving Energy Efficiency or Water Efficiency or Climate Resilience of Affordable Housing ($1 billion) 
1. The IRA will provide $837.5 million to provide loans and grants to fund projects targeting affordable housing and improving energy or water efficiency, enhance indoor air quality or sustainability, implement the use of zero-emission electricity generation, low-emission building materials or processes, energy storage, building electrification or to address climate resilience.
2. Eligible recipients are owners and sponsors of HUD-subsidized Section 202, 811, Project-based Section 8, and Section 236 properties that agree to an extended period of affordability.
3. Principal amount of direct loans supported by the program not to exceed $4 billion. Funding for related activities, including:
1. $60 million for implementation, including financial reporting, research and evaluation and cross-program costs
2. $60 million for cooperative agreements administered by the HUD Secretary
3. $42.5 million for energy and water benchmarking of eligible properties (regardless of whether they receive grants), and data analysis and evaluation at the property and portfolio level

Tax Incentives

In support of clean energy and combating climate change, the IRA extends, modifies and enhances many existing tax incentives and also creates new tax incentives with the same goals. It is difficult to overstate the breath of these changes and the impact they will have.

Generally, entities exempt from federal income taxation – such as local governments – do not benefit from tax incentives contained in the Internal Revenue Code. The IRA has changed this dynamic by unlocking the ability to access these tax incentives. Specifically, under new Internal Revenue Code Section 6417, certain "applicable entities" can elect to be treated as if they made a payment of tax equal to the amount of an "applicable credit." Stated simply, this new section allows certain entities to ask the Internal Revenue Service (IRS) for a cash refund in the amount of credit to which they are entitled, i.e. they can ask the IRS for a direct payment.

As stakeholders await guidance from the IRS on the mechanics of this new section, first effective in 2023, the ability to seek a direct payment of tax credits is a sea change for applicable entities, which includes states and any political subdivision thereof.

There are 12 applicable credits under the IRA that can be elected for direct pay by applicable entities.

Section 30C – Alternative Fuel Refueling Property

• The IRA will extend and modify the tax credit available for alternative refueling property (i.e., electric vehicle (EV) charging), increasing the maximum credit available from $30,000 to $100,000 and allowing the credit to be calculated per single unit rather than per location.
• A credit will also be available to individuals.
• The IRA will extend the credit availability to 2032.
• The IRA will require the property to be placed in a qualified census tract and will make a bonus credit available if wage and apprenticeship requirements are met.
• If the property is depreciable property, the base credit will be 6 percent if the prevailing wage and apprenticeship requirements are met.

Section 45(a) – Production Tax Credit for Electricity Produced from Certain Renewable Resources

• The IRA will extend the renewable energy production tax credit (PTC) until the end of 2024, after which the PTC will transition to technology-neutral.
• This credit applies to the production of energy from solar, wind, geothermal, biomass and hydropower and other eligible projects.
• The phasedown currently in place for wind energy is removed as of Jan. 1, 2022, permitting onshore and offshore wind projects to take the full value of the PTC for 2022, 2023 and 2024.
• The base credit will be 0.3 cents per kilowatt-hour (kWh), with a bonus credit of 1.5 cents per kWh (credit multiplied by five) if prevailing wage and apprenticeship requirements are met (with an exception to these requirements for small projects).
• Taxpayers will be eligible for a bonus 10 percent PTC if certain domestic content requirements are met (adjusted percentage of generally 40 percent for most projects and 20 percent for offshore wind) or if the project is located in an energy community. If eligible for both, taxpayers can benefit from both of these percentage increases.

Section 45Q – Carbon Oxide Sequestration

• The IRA will extend the carbon sequestration credit for facilities that begin construction before 2033 and provides additional modifications, including an enhanced credit for direct air capture (DAC) and lowering the carbon capture threshold requirements at facilities.
• Like PTC and International Trade Commission (ITC), there will be a bonus credit when prevailing wage and apprenticeship requirements are met.
• Generally, the prevailing wage and apprenticeship requirements will be met if:
  • For construction of a facility that begins 60 days after the Secretary of the Treasury published guidance, and any carbon capture equipment placed in service at such facility, such guidance is satisfied.
  • For construction of any carbon capture equipment that begins 60 days after the Secretary of the Treasury publishes guidance, which is installed at a facility, the construction which begins prior to that date, such guidance is satisfied with respect to the carbon capture equipment.
  • For construction of any carbon capture equipment that begins prior to the date that is 60 days after the Secretary of the Treasury publishes guidance, which is installed at a facility, the construction of which also begins prior to the date that the requirements are deemed satisfied.

As with the prevailing wage requirements found in other IRA energy credits, there exists the opportunity for taxpayers to remedy violations.

 

• The IRA will lower the annual thresholds of carbon a facility must capture to qualify:
  • 18,750 tons of carbon oxide for power plants
  • 12,500 tons of carbon oxide for industrial facilities
  • 1,000 tons of carbon oxide for direct air capture (DAC) facilities
• This credit will be available for direct pay for the first five years under broad conditions, and the credits are transferable.
• The credit amounts per metric ton of carbon captured will be as follows:

Section 45U – Zero-Emission Nuclear Power Production Credit

• The IRA will create a PTC for the production of electricity from a nuclear facility beginning in 2024. The credit expires after 2032.
• The base credit will be 0.3 cents per kWh, with a bonus credit of 1.5 cents per kWh (base credit multiplied by five) if the project meets prevailing and apprenticeship requirements.
• The credit is subject to reduction based on gross receipts of any electricity sold.

Section 45V – Credit for Production of Clean Hydrogen

• The IRA will create a PTC and an ITC for clean hydrogen; taxpayers will have the option to elect.
• Clean hydrogen can be produced from different sources, including renewable electricity (green hydrogen) and natural gas reforming (blue hydrogen).
• To qualify, hydrogen must be produced through a process resulting in lifetime GHG emissions of no more than 4 kilograms (kg) of carbon dioxide per kg of hydrogen.
• The base credit amount will be 60 cents per kilogram of qualified clean hydrogen, multiplied by an emissions factor depending on the GHG emissions factor provided by the fuel.
• A bonus credit multiplier is offered if prevailing wage and apprenticeship requirements are met, wherein the applicable credit may be multiplied by five.
• Taxpayers will be able to elect to receive an ITC in lieu of the PTC for a base credit of up to 6 percent, or 30 percent if prevailing wage and apprenticeship requirements are met.
• No clean hydrogen credit will be allowed for a facility that is already qualifying for the carbon sequestration credit.

Section 45W – Credit for Purchase of Commercial Clean Vehicles

• The IRA will create a new credit for qualified commercial clean vehicles.
• The credit will be equal to 15 percent of its cost (30 percent if the vehicle is not powered by gasoline or diesel) or the incremental (excess) cost for such vehicle as compared to one that relies solely on gasoline or diesel.
• The maximum credit will be $7,500 for vehicles with a gross weight rating of 14,000 pounds and $40,000 for all others.
• The credit will apply to any vehicles placed in service after Dec. 31, 2022, through 2032.

Section 45X – Advanced Manufacturing Production Credit

• The IRA will create a new production credit through 2032 for production of components related to clean energy such as solar photovoltaic (PV) cells, wind energy components and battery cells.
• The credits will generally be subject to phase out beginning in 2029.
• The credit amount will vary depending on the applicable eligible component.

Section 45Y and 48E – Clean Energy Production Credit and Clean Energy Investment Tax Credit 

• Beginning in 2025, the traditional ITC and PTC will generally no longer apply. They will be replaced by new technology-neutral credits.
• Eligibility for these credits generally requires that the facility's GHG emissions are no greater than zero.
• The 45Y base credit value is 0.3 cents per kWh with a bonus credit (base credit multiplied by five) if prevailing wage and apprenticeship requirements are met.
• The 48E base credit value is 6 percent with a bonus credit (credit multiplied by five) if prevailing wage and apprenticeship requirements are met.
• These credits phase out in 2032, or when the Secretary of the Treasury determines that the annual GHG emissions are equal to or less than 25 percent of the emissions produced in 2022, whichever is earlier.
• There will be a potential 10 percent onus credit for energy communities and when domestic content requirements are met.
• The applicable percentages to meet the domestic content requirements increase over time:
  • Generally, the adjusted percentage is 40 percent until 2025, 45 percent in 2025, 50 percent in 2026, and 55 percent after 2026.
  • The adjusted percentage for offshore wind facilities is 20 percent until 2025, 27.5 percent in 2025, 35 percent in 2026, 25 percent in 2027, and 55 percent after 2027.

Section 45Z – Clean Fuel Production Credit

• Beginning on Dec. 31, 2024, existing fuel credits will transition to the Clean Fuel Production Credit.
• The credit will expire at the end of 2027.
• In order to receive the full credit the fuel must have a life-cycle emission level of less than 50 kilograms of carbon dioxide per Metric Million British Thermal Unit (mmBTU).
• The base credit for transportation fuel will be 20 cents per gallon, while the SAF base credit will be 35 cents per gallon.
• The base credit is adjusted downward based on the emission factor of the fuel.
• The bonus credit is available (base credit multiplied by five) if production meets prevailing wage and apprenticeship requirements.

Section 48 – Energy Credit (Investment Tax Credit)

• The IRA will extend the investment tax credit (ITC) for solar energy property and most other ITC-eligible property until the end of 2024. (Geothermal credit will be extended until 2035.)
• Like the PTC, the ITC will transition to technology-neutral in 2025.
• The IRA will expand what is eligible for the ITC, including energy storage technology.
• The base credit will be 6 percent, with a bonus credit of 30 percent (base credit multiplied by five) if prevailing wage and apprenticeship requirements are met.
• Similar to the PTC, taxpayers will be eligible for an additional 10 percent ITC if certain domestic content requirements are met or if the project is located in an energy community.
• In addition, there will be a potential 10 percent bonus credit for solar and wind facilities that are located in low-income communities.
• Alternatively, there will be a potential 20 percent bonus credit for solar and wind facilities that are part of a qualified low-income residential building project or a low-income economic benefit project.

Section 48C – Advanced Energy Production Credit

• The IRA will revise and extend the advanced energy project credit.
• This credit will be available for a wide range of renewable energy equipment and will be focused on the manufacturing facilities related to the production of equipment.
• The advanced energy project credit will be an allocated tax credit (i.e., the IRA will set a maximum that can be allocated on a competitive basis).
• Specifically, the IRA will allocate $10 billion, of which at least $4 billion must be allocated to energy communities.
• The base credit will be 6 percent, with a bonus credit available (base credit multiplied by five) if prevailing wage and apprenticeship requirements are met.

The tax credits described above may be subject to reduction if such projects are financed with tax exempt bonds.

In addition to tax credits mentioned above, tax incentives are also found in the form of tax deductions. Like tax credits, tax deductions are generally not beneficial to those entities that are not subject to federal income tax. However, the tax deduction under Section 179D has been and continues to be under the IRA, available to property owned by state, local governments and political divisions thereof. Specifically, government entities can benefit from Section 179D by allocating the deduction to the person primarily responsible for designing the property (e.g., architect, engineer, contractor, environmental consultant or energy-services provider).

By way of background, Section 179D provides a tax deduction for making efficiency improvements to commercial buildings. Energy-efficient building property that qualifies for the deduction includes improvements to the building envelope, certain heating, ventilation and air conditioning systems and lighting systems. It applies to new construction and the retrofitting of existing buildings. Government entities will want to reconsider the value of the Section 179D, given that the IRA enhances the value of the deduction and lowers the threshold such that deductions will be available for buildings that improve energy efficiency by 25 percent (down from 50 percent).

For More Information

For a full overview of the IRA in its entirety, please see the previous Holland & Knight alert, "The Inflation Reduction Act: Summary of the Budget Reconciliation Act," Aug. 17, 2022.

Members of Holland & Knight's Local Government Advocacy Team, along with other attorneys in relevant practices, stand ready to assist clients in understanding the IRA as well as with navigating and engaging the federal agencies through implementation.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.