The Inflation Reduction Act of 2022 (IRA) was one of the most significant legislative victories of the Biden administration, fostering tens of billions (USD) in planned clean energy investments, much of this yet to be deployed. What will happen to these subsidies next year in the Trump administration?
IRA tax credits are at risk
Many believe that Republicans will ultimately decide to leave the IRA largely untouched because most of the investments and jobs spurred by the Act are benefitting traditionally Republican states and constituencies. We believe the likely outcome will be less rosy and more nuanced for IRA incentives.
Republicans will find a way to get a tax reform bill to Trump’s desk, but it won’t be easy
With a slim majority in both houses of Congress, the Republicans will be able to move a major tax bill in 2025 through the budget reconciliation process, which they can pass in both houses with simple majority votes. This is virtually a mandate for the Republicans as most of the major provisions of the 2017 Tax Cuts and Jobs Act expire at the end of 2025. We expect this bill to pass Congress and be signed by the President by late 2025. This will not be an easy process, however, since the slim margins in both houses effectively means that nearly every member of Congress has veto power over the bill, and a full extension of TCJA will cost the Treasury roughly $5 trillion relative to budget baseline. Where some assume that Republicans will ignore the deficit impact, we think there will be enormous pressure on the party to provide at least some significant revenue offsets, and the process will require that they find offsets for years beyond the 10 year budget window. The easiest revenue offsets to use among difficult options will be repeal and reduction of IRA tax incentives.
Most likely IRA tax credit repeals/reductions
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Consumer EV credit and commercial EV credit: potential offset value over $100 Billion
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Clean electricity ITC and PTC, likely phase-out: potential offset value over $120 Billion
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Clean energy manufacturing production credit, likely reduction/modification: potential offset value over $150 Billion
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Other incentives like clean fuels and hydrogen may survive but perhaps with anti-China or other amendments
Without question, there will be fierce lobbying battles over all of these and other energy tax incentives as the debate over the 2025 tax bill plays out in Congress. And no outcome with respect to each credit is preordained.
We are happy to discuss the potential impacts to your business and how we can help you position yourself to mitigate any risks.
Authored by Jamie Wickett and Megan Ridley-Kaye.
