Energy Tax Credits and the IRA: Recommendations for Equitable Outcomes
The Inflation Reduction Act, passed in August, marked the biggest climate action ever passed by Congress, with tax incentives accounting for the majority of the bill’s spending commitments. Totaling an estimated $270 billion in tax expenditures over the next decade, the energy tax credits are expected to drive the transition away from fossil fuels via market mechanisms that will guide private sector actors. These tax credits do contain some promising provisions, including making increased credit amounts available via “adders” for projects installed in connection with affordable housing or sited in certain “energy communities” that will be particularly impacted by the energy transition. However, there are significant obstacles to environmental justice communities and their residents realizing direct benefits from this suite of tax incentives.
As we have previously highlighted in an issue brief co-published with the Roosevelt Institute, historically, energy tax credits have disproportionately benefited rich, white households. Even accounting for the inclusion of adders, the tax credits system is fundamentally unchanged in that direct benefits will largely remain out of reach of low-income households and may potentially exacerbate existing racial, income-based, and pollution burden disparities.
At the same time, thoughtful implementation of the law in a way that centers justice can lead to significant improvements in equity outcomes. Especially because the Department of Treasury and Internal Revenue Service (IRS) cannot rely on institutional expertise in environmental justice issues in implementing these tax incentives, we strongly recommend providing increased opportunities for both feedback from and targeted outreach, education, and technical assistance to environmental justice communities, as well as robust interagency coordination and alignment with existing federal environmental justice initiatives, especially at the Department of Energy and as part of the Justice40 initiative.
Our recommendations to the Department of Treasury and IRS include:
- Provide more opportunities for feedback from environmental justice communities, from both community-based organizations and individuals;
- Take actions to reduce the equity gap given that many tax incentive benefits will not reach environmental justice communities and low-income households;
- Increase transparency and accessibility of information;
- Clarify that taxpayers with an ITIN can qualify for tax incentives;
- Integrate equity considerations throughout the guidance;
- Include the Department of Energy’s Office of Economic Impact and Diversity in implementation;
- Consider the tax incentives under the Justice40 Initiative;
- Ensure that greenhouse gas emission rates take all emissions into account;
- Ensure that the low-income solar and wind program prioritizes projects that provide the most benefits to local communities, community partnership in project development, and equitable community solar projects; and defines “financial benefit” to focus on reducing energy burden, avoiding adverse consequences for tenants, and ensuring that real benefits reach low-income households and communities;
- Include consumer protections related to transferability for low-income taxpayers;
- Streamline application for direct pay of credits to nonprofits serving low-income and disadvantaged communities;
- Prioritize local hire by requiring reporting and outreach;
- Prioritize equitable energy efficiency and building decarbonization programs.
To read our full letter responding to the six Notices (2022-46, 2022-47, 2022-48, 2022-49, 2022-50, and 2022-51) issued by Treasury and the IRS, click here.