Reforming the Inflation Reduction Act: Four Potential Pathways 4

The Inflation Reduction Act (IRA) introduced numerous targeted tax incentives, many of which are proving significantly more costly than initially projected. As policymakers seek ways to offset the expense of extending the Tax Cuts and Jobs Act (TCJA) provisions, repealing these subsidies is a key consideration.

While some Republican lawmakers support certain IRA elements, a full repeal may be politically challenging. House Speaker Mike Johnson suggests a nuanced approach, advocating for targeted reforms rather than wholesale elimination. This involves a strategic balance: eliminating ineffective policies while refining those with merit.

Cost vs. Revenue: Understanding the Discrepancy

IRA credit cost estimates vary widely. The Treasury’s latest projections indicate a $1.16 trillion cost from 2025 to 2034, comprising $830 billion in lost revenue and $330 billion in outlays. Some estimates, factoring in different technological adoption and regulatory assumptions, place the cost as high as $1.97 trillion over the next decade.

It’s crucial to distinguish between tax expenditure costs and potential revenue gains from repeal. Tax expenditure estimates don’t account for behavioral changes or interactions with other tax provisions. Additionally, some IRA credits involve future payouts, making immediate repeal complex.

Option 1: Complete Repeal of IRA Green Energy Tax Credits

A full repeal of IRA green energy tax credits is estimated to generate $851 billion in revenue from 2025 to 2034.

Table 1. Estimated Revenue from Full Repeal (Billions)

Option 2: Targeted Provision Elimination

As an alternative to full repeal, focusing on specific provisions is viable. Given that power sector provisions are deemed most effective for emissions reduction, targeting other sectors is logical. EV tax credits, for example, often benefit those who would purchase EVs regardless of incentives.

Repealing tax credits for EVs, refueling property, clean fuel production, and residential energy efficiency is projected to yield $295 billion.

Table 2. Estimated Revenue from Targeted Repeal (Billions)

Option 3: Streamlining the IRA

The IRA’s “Everything Bagel Liberalism” approach, addressing numerous issues simultaneously, can be streamlined. Removing add-on subsidies, such as prevailing wage and apprenticeship requirements, would simplify the act.

Replacing the existing Production Tax Credit (PTC) with a flat-rate PTC and consolidating the Investment Tax Credit (ITC) into it could generate $207 billion.

Table 3. Estimated Revenue from PTC/ITC Reform (Billions)

Option 4: Substantial IRA Repeal

A more aggressive approach involves repealing most IRA credits, while retaining the nuclear power production and carbon sequestration credits, and implementing the reformed PTC/ITC. This is projected to raise $746 billion.

Table 4. Estimated Revenue from Substantial Repeal (Billions)

Key Uncertainties

These estimates are based on current regulatory assumptions, which may change. Changes to EPA tailpipe emissions regulations could impact EV adoption and, consequently, revenue estimates. Additionally, the modeling doesn’t fully account for gas tax revenue feedback or the impact of direct pay and transferability options on revenue. Therefore, actual revenue impacts could vary.