The IRA: What Hath Washington Wrought?

This is the first of a three-part series on the new Inflation Reduction Act. It offers a general assessment of the law followed by a more detailed summary of its green initiatives. The second part in this series will deal with the revenue enhancers in the law, while the third part will take up the implications of its health care rules.

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Washington’s Inflation Reduction Act (IRA) has passed into law. Despite its name, the legislation makes only tentative gestures toward inflation control. It mostly concerns itself with Washingtons’ preferred green initiatives and aims to promote them with a raft of grants and loan guarantees as well as tax breaks to people and businesses. It extends some health care benefits to low-income Americans and to some not such low-income Americans. And it aims to pay for all this by upping corporate taxes and using stepped up Internal Revenue Service (IRS) enforcement to collect more from everyone.

Federal outlays under this law will increase some $435 billion over the next five years. New taxes and enforcement, the law’s sponsors claim, will more than offset this spending so that budget deficits will shrink over time. That is the official position, but room for skepticism remains. Administration of new corporate tax looks so complex there will be ample slippage in the amount collected, and it is doubtful that the $80 billion for IRS enforcement will pay for the expense much less net a revenue increase. The highly-regarded Penn-Wharton budget Model has determined that the legislation will neither have much effect on inflation nor provide any deficit relief. Separately, the Congressional Budget Office (CBO) sees a “negligible effect on inflation” from this legislation and no meaningful reduction in deficits.

Green initiatives take the bulk of the legislation’s outlays – some $385 billion over the next five years. The law offers generous tax benefits and some $40 billion in loan guarantees to promote carbon capture and “clean hydrogen” at electric facilities (regardless of energy source). It also offers tax credits and loan guarantees for nuclear power production as well as “clean vehicles” of all sorts. This support would extend to biogas projects and the use of fuel cells as well as energy storage technologies, including carbon capture and sequestration. It would support advanced manufacturing in similar ways. Some $2 billion in direct loans would go to the construction and modification of electric transmission facilities. The law allows the transfer of credits to unrelated parties, but only under certain circumstances. It repeals the Trump-era moratorium on offshore wind leases.

The IRA also aims to reduce greenhouse emissions 40% by 2030. The effort gives the Department of Energy (DOE) authority to advance an array of grants and rebates, as well as direct loans and cooperative agreements to pay for up to half the costs of promising projects. Some would aim to improve the efficiency of household heating and cooling systems as well as appliances, with $1 billion earmarked for “affordable housing.” Some $60 billion would go for what the legislation refers to as “environmental justice initiatives” through which it would aim benefits at previously underserved neighborhoods. The legislation also allocates some $27 billion to the Environmental Protection Agency (EPA) to provide financial and technical support for projects that promise to reduce greenhouse gas emissions. The Agriculture Department would get funding to do the same in farming, while auto makers would get $6 billion to produce hybrid and plug-in electric vehicles in the United States.

Centralized control is the theme throughout this part of the legislation. The heads of all the agencies involved have considerable discretion on what activities can qualify for support and how they could qualify. Washington in other words would not only direct the emphasis of production but also the way people can pursue it.

It would seem against this quest for government command and control, complexity and expense, practical people would prefer something simpler and likely more effective. A carbon tax would do that. By making the emission of greenhouse gases expensive, such a tax would unleash a great diversity of effort to limit the use of fuel and the release of emissions. Every American would seek ways to reduce his or her carbon footprint. Instead of the IRA’s list of preferred technologies and commands on how to use them, this kind of general effort would engage everyone’s imagination. It would also proceed with more vigor than the IRA’s dictates could possibly muster. Further, a carbon tax would replace this law’s huge outlays with added revenues, perhaps enough to offer Americans other needed benefits or even a cut in other tax burdens. Washington, however, will not likely consider such an approach. Politicians and bureaucrats love command and control too much.