The Inflation Reduction Act: Landmark Climate and Tax Reform Legislation Moving through Congress

The U.S. Senate passed highly anticipated legislation to reform climate, tax, and health care policy on Aug. 7, 2022, after a 15-hour amendment process. The Inflation Reduction Act of 2022 was adopted by the Senate with a 51-50 party-line vote through the reconciliation process, which avoids a filibuster. The Senate’s passage of the bill culminates a year and a half of difficult negotiations, resulting in a smaller package than originally proposed in Build Back Better, but a legislative landmark for the Democrats, nonetheless. Next steps are the anticipated action by the House of Representatives by the end of the week before being sent to President Biden for signature. The Inflation Reduction Act contains targeted, but limited, transportation benefits that IBTTA members may find of interest.

The bill distinguishes itself from the Infrastructure Investment and Jobs Act (IIJA) in that it is expected to generate $739 billion in new revenue over 10 years through new corporate tax thresholds, heightened Internal Revenue Service (IRS) enforcement, and prescription drug pricing reforms. The IIJA was absent of any substantive new transportation revenue programs, funded nearly entirely through an $118 billion transfer to the Highway Trust Fund from the federal General Fund.

The Inflation Reduction Act (IRA) proposes to invest $369 billion in energy and climate change-related measures, in addition to $64 billion to extend Affordable Care Act premium subsidies. Approximately $300 billion of the legislation’s funding would be used to address federal deficit reduction.  

The $369 billion proposed to address the climate crisis is the largest climate investment ever, designed to reduce carbon emissions by 40 percent by 2030. The legislation would expand tax credits for electric vehicles (EVs) and clean energy initiatives, create a national climate bank, support climate-smart agriculture, and address climate change from aviation fuel sources and port operations. 

One of the more highly touted incentives for electric vehicle adoption is the provision for tax credits for the purchase of new EVs. However, the Buy America provisions in the bill are so stringent that no EV currently available in the marketplace would qualify for a tax credit given the current levels of foreign-sourced parts and materials. The bill does include any waivers, with policy and business analysts looking to how the requirements are defined and applied by the Treasury Department and IRS as the means to allow today’s vehicles to qualify. The Treasury Department has the authority to determine how U.S. businesses are allowed to interact with “entities of concern,” and the IRS will decide how and when to calculate how much of a battery is foreign made.

Clean vehicle tax credits of up to $7,500 are provided for new vehicles (Section 13401), and up to $4,000 for used vehicles (Section 13402). The legislation also eliminates a cap of 200,000 vehicles per manufacturer, which had been preventing certain vehicle manufacturers—e.g., Tesla, Toyota, and General Motors—from fully benefiting from EV tax incentives. High-income households are ineligible for tax credits. For the new vehicles, the credit is limited to couples with annual earnings of less than $300,000, and individuals earning less than $150,000. For used vehicles, the annual earning limits are $150,000 for couples and $75,000 for individuals. The clean vehicle credit is also tied to the retail price of the vehicle, prohibiting use to purchase vans, SUVs, or pick-up trucks retailing above $80,000 or any other vehicles retailing above $55,000.

Some of the other noteworthy provisions for the transportation sector, include:

• Low-carbon Transportation Materials Grants - Section 60506 of the bill allocates $2 billion “to reimburse or provide incentives to eligible recipients for the use of low-embodied carbon construction materials and products in projects.” Eligible reimbursements include payments to non-federal partners for the added incremental costs of using low-carbon materials over traditional construction materials and a 2 percent incentive payment of the cost of using low-carbon materials. U.S. Federal Highway Administration (FHWA) administrative costs are also eligible for reimbursement. The program also prohibits funding for “projects that result in additional through travel lanes for single-occupant passenger vehicles.” 
• Environmental Review Implementation Funds - The bill provides $100 million in Section 60505 to help develop and review documents for the environmental review process required for proposed projects. The funding targets a broad range of activities including technical assistance, templates, guidance, training, or and other means to ensure efficient and effective environmental reviews.
• Neighborhood Access and Equity Grant Program - In Section 60501, this program provides funding for activities similar to the Reconnecting Communities Pilot Program in IIJA aimed to improve walkability, safety, and affordable transportation access, including the removal of facilities that divide communities. There is $1.9 billion available at an 80 percent federal share, and a special set aside of $1.1 billion at 100 percent federal share for economically disadvantaged communities. There is also $42 million for technical assistance from FHWA. This section also prohibits funding for projects that create “additional through travel lanes for single-occupant passenger vehicles.”