On Tuesday, August 16, President Biden signed H.R. 5376, the Inflation Reduction Act of 2022 (IR Act) into law. The legislation was passed by the Senate on August 7 after a grueling weekend session with nearly 16 hours of voting on amendments. The House returned from recess on August 12 and passed the measure on a party-line vote.

The IR Act represents a major victory for congressional Democrats heading into the November midterm elections. The bill, which was primarily negotiated by Senate Majority Leader Chuck Schumer (D-NY) and Energy and Natural Resources Committee Chairman Joe Manchin (D-WV), includes:

• Funding for climate and clean energy investments,
• Prescription drug pricing reforms and an extension of enhanced health care premium tax credits, and
• Corporate tax changes for corporations and increased tax code enforcement.

The Congressional Budget Office (CBO) estimated the bill will generate $739 billion in total revenue, which includes $433 billion in spending and over $300 billion dedicated to deficit reduction. The vast majority of the spending—$369 billion—is for tax credits and other funding to address climate and energy security. An additional $64 billion funds a three-year extension of enhanced Affordable Care Act (ACA) premium tax credits. The “pay-fors” to cover the investments include: (i) $313 billion from a 15 percent minimum corporate tax, (ii) $288 billion from prescription drug pricing reforms, (iii) $124 billion from bolstering IRS tax enforcement, and (iv) $74 billion from a 1 percent excise tax on corporate stock buybacks.

Below, Dentons’ Federal Policy team provides top-line summaries of the climate and clean energy investments, the health care provisions, and the tax changes included in the legislation.

I. Climate and Clean Energy Investments

The energy security and climate section of the bill aims to reduce greenhouse gas (GHG) emissions roughly 40 percent by 2030. Below are key energy provisions from the IR Act, as it currently stands.

A. Clean Energy Tax Credits

1. Production Tax Credit (PTC)

The IR Act extends the PTC, which expired at the end of 2021, for renewable energy until the end of 2024. Qualifying resources include wind, along with other renewable resources, such as biomass, municipal solid waste, geothermal, hydropower and hydrokinetic energy. With respect to the value of the credit, the IR Act treats all renewable resources equally.

The base credit of the PTC is 0.3 cents per kWh, but projects could receive a credit up to 1.5 cents per kWh (2.5 cents per kWh in 2022 adjusted for inflation) provided they meet prevailing wage and apprenticeship requirements. Projects could also receive an additional 10 percent credit if they meet domestic content requirements. A bonus credit of 10 percent is available for projects in energy communities, which are defined as an area that has (or, at any time during the period beginning after December 31, 1999, had) significant employment related to the extraction, processing, transport or storage of coal, oil or natural gas.

Following 2024, the IR Act establishes a tech neutral PTC for projects, which will remain in effect until 2032 or when the following CO2 emission targets are achieved: When the electric power sector emits 75 percent less CO2 than 2022 levels, the incentives will be phased out over 3 years. Facilities will be able to claim a credit at 100 percent value in the first year, then 75 percent, then 50 percent, and then 0 percent.

Direct pay in lieu of the PTC is only available for tax-exempt entities. Manchin was critical of direct pay for the private sector. Projects, though, are permitted to transfer the tax credits to another taxpayer.

2. Investment Tax Credit (ITC)

The IR Act extends the federal investment tax credit (ITC) for renewable energy from the end of 2023 to the end of 2024. The compromise expands the ITC to energy storage technology, biogas and microgrid controllers. Similar to the PTC, the compromise provides a base ITC of 6 percent that could be extended to 30 percent if certain prevailing wage and apprenticeship requirements are met. There are also bonus credits if such projects satisfy domestic content requirements and invest in energy communities. Following 2024, IR Act transitions the ITC to a technology neutral incentive.

In contrast to the House Build Back Better Act (BBB Act), the IR Act does not extent the ITC to new transmission projects. Other provisions in the IR Act are intended to support new transmission projects.

3. Carbon Capture Tax Credit

The IR Act extends and expands the Section 45Q tax credit for carbon capture for facilities that start construction before 2033. To qualify for the credit, the IR Act sets out new requirements. Carbon capture technology employed at power plants must capture at least 75 percent of the CO2 emitted to qualify for the credit and such technology must capture at least 50 percent of the CO2 emitted at industrial facilities. Direct air capture facilities must capture no less than 1,000 metric tons per year of CO2.

4. Hydrogen Production and Investment Tax Credits

The IR Act includes a PTC for clean hydrogen, which it defines as “hydrogen produced through a process that yields no more than 4 kg of CO2e per kg of hydrogen.” The credit would be $0.60 per kg times the applicable percentage, which ranges from 20 to 100 percent, depending on how clean the hydrogen is. If applicable wage and registered apprentice requirements are met, the credit goes up to $3 per kg times the applicable percentage. Taxpayers may elect to take an ITC in lieu of an PTC.

There is a 10-year applicability for the credit for any facility where construction has commenced prior to January 1, 2033.

The IR Act requires that the hydrogen be sold or used by an unrelated party to qualify for the credit. Any hydrogen facility that could also qualify for the Section 45Q carbon capture credit could not receive a hydrogen credit.

5. Electric Vehicles (EVs) Tax Credit and Grant for Clean Heavy Vehicles

The IR Act provides up to a $7,500 income tax credit to lower- and middle-income consumers for new EVs and a $4,000 tax credit for previously owned EVs. Only vehicles whose final assembly occurs in North America will be eligible for the credit. The credit will be lessened or eliminated depending on the purchaser’s income. The bill restricts vehicles with retail prices above certain levels from qualifying for the credit. In addition, the bill prohibits manufacturers from claiming the credit if the vehicles contain minerals that “were extracted, processed, or recycled by a foreign entity of concern,” which is defined as state sponsors of terrorism or countries blocked by the Treasury Department.

In addition, the bill creates a 30 percent tax credit for the purchase of new clean commercial EVs. The IR Act also provides $1 billion for clean heavy duty vehicles like school/transit buses and garbage trucks.

Manchin had previously expressed skepticism regarding the EV credit but the IR Act ultimately included an extension of this credit.

6. Advanced Manufacturing Tax Credit

Under the IR Act, domestic production and sale of qualifying components would receive Section 48C advanced manufacturing tax credit. The credit is available to an advanced energy project which re-equips a manufacturing facility with equipment designed to reduce GHG emission by at least 20 percent. The credit would increase by 10 percent for components manufactured in facilities operating under a collective bargaining agreement. The credit would phase out to 75 percent of the full credit amount for products sold after December 31, 2029. Components sold in 2031 would be eligible for 50 percent and in 2031 for 25 percent of the full credit amount. No credit would be available for components sold after 2032. The IR Act has added batteries and critical minerals to the list of solar and wind items that were eligible for this tax credit under the BBB Act.

7. Zero-Emission Nuclear Production Tax Credit and Other Credits

The IR Act includes a variety of different tax incentives for existing nuclear, energy efficiency, clean fuels and environmental justice, among other provisions. Section 13015 of the bill provides a credit for the production of electricity from a qualified nuclear plant, which is defined as any nuclear facility that is owned by the taxpayer, uses nuclear energy to produce electricity, and is placed in service before the date of enactment. The bill provides a base credit rate of 0.3 cents per kilowatt hour and a bonus credit rate of 1.5 cents per kilowatt hour for electricity produced by the taxpayer and sold to an unrelated entity. To claim credit for the bonus rate, the taxpayer must meet prevailing wage and apprenticeship requirements for the taxable year.

The credit is reduced as the sale price of electricity increases. The credit reduction formula lowers the credit by 80 percent of the excess of gross tax receipts (including federal, state and local zero-emission grants) from any electricity produced and sold by the facility over the product of 0.5 cents times the amount of the electricity sold during the taxable year.

The nuclear production tax credit applies to electricity produced and sold after December 31, 2023, and it expires after December 31, 2032.

8. Clean Fuels Tax Credits

The IR Act provides an extension of the $1/gallon excise tax credit for biodiesel and biodiesel mixtures. It also includes an extension of the $0.10/gallon production tax credit for small agricultural biodiesel producers and an extension of the $0.50/gallon excise tax for alternative fuels.  Excise taxes expire on January 1, 2025. The IR Act also includes an extension of the ITC for second generation biofuels produced after December 31, 2021 and sold before January 1, 2025.

For aviation fuels, there is a new refundable blenders tax credit of $1.25/gallon plus $0.01 for each percentage point by which emissions reduction exceeds 50 percent when compared to petroleum based jet fuel. Producers seeking the credit must be registered with the Secretary of Energy and must comply with the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) or similar standard. The aviation fuel credit will terminate after December 31, 2024.

9. Energy Efficiency Tax Credits

Section 13301 of the bill would extend and modify the non-business energy property tax credit for property placed in service before December 31, 2032. This tax credit would be increased from 10 to 30 percent and the cap would be increased from $1,200 to $2,000. Section 13102 of the bill extends the tax credit for qualified residential clean energy property for solar electric, solar water heaters, small wind and geothermal heat pumps. The tax credit reduces over time from 30 percent through 2032, to 26 percent in 2033, to 22 percent in 2034, after which it would expire. Section 13303 updates and increases the tax deduction for energy efficient commercial buildings with a credit of $0.50/square foot up to $2.50/square foot for meeting prevailing wage and apprenticeship requirements. Section 13304 extends and increases the energy efficiency home tax credits of up to $2,500 for homes that meet ENERGY STAR residential new construction requirements. A $5,000 credit is provided for homes that meet the Department of Energy Zero Ready Home requirements.

B. Methane Emissions

The IR Act includes a compromise fee on methane emissions. Excess methane emissions from oil and gas facilities would face a fee of $900/metric ton in 2024 under the Act. The proposed charge would increase to $1,200 in 2025 and then $1,500 in 2026 and subsequent years. The Environmental Protection Agency (EPA) would impose the fee, which would apply to both onshore and offshore oil and gas production, as well as to storage facilities, transmission compression equipment, and gathering and boosting systems. It would also apply to onshore natural gas transmission pipelines and equipment involved in LNG storage, imports and exports. For oil and gas production facilities, the fee would be imposed on reported methane emissions that exceed 0.2 percent of the natural gas sent to sale from the site or 10 metric tons of methane per million barrels of oil sent to sale from the facility. For natural gas transmission, the charge would be for methane emissions that exceed 0.11 percent of the natural gas sent to sale.

The IR Act also has two new incentive programs related to methane emissions. It would provide $800 million through Sept. 30, 2028, for a new incentive program through EPA with grants, rebates, loans and other activities to help report and mitigate methane emissions from the oil and gas industry. In addition, $700 million through Sept. 30, 2028 is provided for methane mitigation from conventional wells.

C. Department of Energy (DOE) Funding

The IR Act provides DOE with funding for a variety of clean energy priorities, including EVs, transmission, industrial de-carbonization and energy efficiency. Notably, the bill provides an additional $3.6 billion in loan authority to the DOE Loan Programs Office, providing the Department with $40 billion in total authority. It also provides $5.8 billion to the DOE Office of Clean Energy Demonstrations through September 30, 2026, for a new advanced industrial facilities deployment program.

HALEU Funding

The bill provides $700 million for High-Assay Low Enriched Uranium (HALEU) through the end of FY 2026. $500 million is provided for enrichment technology for commercial use in the form of demonstration projects as well as the acquisition and provision of HALEU from a stockpile owned by DOE. The bill also provides $100 million for DOE and Nuclear Regulatory Commission (NRC) certification of transportation packages, as well as assisting commercial entities to design and license transportation packages for HALEU. Finally, the IR Act provides $100 million for activities to support the availability of HALEU for civilian research, development, demonstration and commercial use under section 2001 of Energy Act of 2020.

D. Changes to Oil and Gas Leasing on Federal Lands

The IR Act raises onshore and offshore royalty rates, increases minimum oil and gas bids, raises rental rates, establishes new inspection fees, establishes new bonding requirements and eliminates non-competitive leasing, among other changes to federal oil and gas leasing programs. In a 180-degree shift from the BBB Act, which eradicated all new oil and gas leasing on federal lands, the IR Act would require the Department of the Interior (DOI) to offer two million acres of public lands and 60 million acres of offshore lands for oil and gas leasing. The Act ties oil/gas leasing to offshore wind by prohibiting any offshore wind lease sales unless the DOI has held at least one offshore oil and gas lease sale—for at least 60 million acres—within the previous year. Similarly, leasing of public lands onshore must be paired with similar offerings for oil drilling over the next ten years.

E. Environmental Justice Grants

The IR Act provides over $60 billion for environmental justice priorities for investments in disadvantaged communities. For Environmental Justice and Community Block Grants, the bill provides $3 billion for projects in disadvantaged communities that address environmental and public health harms from climate change. It also provides $3 billion for Neighborhood Access and Equity Grants, which advances equitable transportation and community planning. An additional $3 billion is provided to address air pollution. In addition, many of the clean energy tax credits and consumer home energy rebate programs drive investment and economic development in disadvantaged communities.

F. Rural Renewable and Climate Programs

The IR Act gives the US Department of Agriculture nearly $14 billion to support rural electric cooperatives purchasing renewables.

In addition, the IR Act provides more than $20 billion for climate-smart agriculture practices.  Also, there is $5 billion in grants for healthy, fire-resistant forests; forest conservation; and tree planting. The Act also includes $2.6 billion in grants to restore and conserve coastal habitats and protect nearby communities.

G. Electricity Transmission

The IR Act provides new funding for transmission, including: $2 billion to the DOE for loans for transmission projects in the national interest; $1 billion to the DOE for grants to assist states in siting transmission lines; $100 million to the DOE to conduct analysis and planning for offshore and interregional transmission planning; and $5 billion to help the DOE retool and repower transmission and generation projects.

H. Energy Efficiency Funding

The bill provides $837.5 million until September 30, 2028, for loans and grants (not to exceed $4 billion) that improve energy or water efficiency. The IR Act also provides $4.3 billion for states to set up HOMES rebate programs for single-family homes, multi-family homes, and low- and moderate-income home heating. Rebates are capped and increase according to amount of increased energy efficiency. The IR Act also provides $4.275 billion for a high-efficiency electricity home rebate program in which it provides specific capped levels of funding for upgraded (more energy efficient) appliances, as follows: (i) not more than $1,750 for a heat pump water heater; (ii) not more than $8,000 for a heat pump for space heating or cooling; or (iii) not more than $840 for an electric cooktop or stove or electric clothes dryer. This provision also allows rebate funding for non-appliance upgrades but sets an overall cap on multiple rebates at no more than $14,000. 

I. Superfund Tax Increase for Petroleum Products

To offset the $433 billion price tag, the IR Act includes a number of revenue-raising provisions. In the energy arena, the Act reinstates the Hazardous Substance Superfund Financing Rate on crude oil and imported petroleum products at the rate of 16.4 cents/per gallon through 2032. 

II. Health Care Provisions

The health care section of the IR Act includes several provisions intended to lower prescription drug costs for people with Medicare and reduce drug spending by the federal government. The bill also extends for three years enhanced ACA premium tax credits (PTCs) for individuals purchasing insurance through individual exchanges, which was first enacted as part of the American Rescue Plan (ARP) Act of 2021.

A. Medicare Prescription Drug Provisions

1. Medicare Drug Price Negotiation

The IR Act requires the Department of Health and Human Services (HHS) to negotiate prices for certain high-cost drugs covered by Medicare Part D (retail prescription drugs) and Part B (drugs administered by physicians). Negotiation-eligible drugs include top-spending brand name and biologic drugs without generic or biosimilar equivalents that are a certain number of years from Food and Drug Administration (FDA) approval. The total number of drugs required to be negotiated is as follows:

• 10 Part D drugs in 2026
• 15 Part D drugs in 2027
• 15 Part B and Part D drugs in 2028
• 20 Part B and Part D drugs in 2029 and thereafter.

To ensure drug manufactures enter into negotiations over negotiation-eligible drugs, the bill includes an excise tax (imposed on the prior year sales of the drug) for manufacturers that refuse to negotiate; the tax starts at 65 percent and increases by 10 percent every quarter up to 95 percent. In addition, manufactures that do not provide access to a negotiated drug at the “maximum fair price” are subject to civil monetary penalties of up to 10 times the difference in price between the price charged and the negotiated price.

2. Inflation Rebates to Limit Drug Price Increases

The IR Act attempts to limit drug price increases by requiring drug manufacturers that increase the price of drugs covered by Medicare by more than the rate of inflation to pay a rebate, beginning in 2023. Originally, this policy would also apply to drugs purchased by private insurance, but that provision was removed after the Senate Parliamentarian concluded it was not eligible for reconciliation.

3. Out-of-Pocket Spending Caps and other Benefit Changes to Part D

The IR Act redesigns the Part D benefit to lower beneficiary spending and realigns incentives across Medicare, plans and manufacturers to account for high drug costs. With respect to beneficiary changes, the bill caps out-of-pocket (OPP) spending under Medicare Part D at $2,000 per year, beginning in 2025. It also allows beneficiaries to spread out OPP costs over the full year, and it eliminates the 5 percent beneficiary co-pay for catastrophic coverage in 2024. Premium growth is also limited to no more than 6 percent per year between 2024 and 2026. Finally, the bill expands the low-income subsidy (LIS) program to seniors earning less than 150 percent of the federal poverty level (FPL). 

4. Repeals the Trump Administration’s Prescription Drug Rebate Rule

The IR Act prohibits the implementation of a rule promulgated under the Trump administration that would alter an anti-kickback statute (AKS) regulatory safe harbor to restrict the use of manufacturer drug rebates to Medicare Part D plans. Implementation of the rule was delayed until 2026 as part of the Infrastructure Investment and Jobs Act, and was delayed an additional year by the Bipartisan Safer Communities Act. The IR Act permanently prohibits the implementation of the rule, which saves the federal government more than $122 billion.

5. Vaccine Access in Part D, Medicaid and CHIP

The IR Act eliminates cost-sharing for adult vaccines covered under Medicare Part D, and it requires Medicaid and CHIP programs to cover all vaccines recommended by the Advisory Committee on Immunization Practices (ACIP) without cost-sharing.

6. Limits Insulin Costs for Medicare Beneficiaries to $35 per month

The IR Act limits the price of insulin for Medicare beneficiaries to $35/month. Democrats attempted to extend this limitation to the private market by including it in the manager’s amendment, but Senate Republicans removed the private-market provision by challenging it based on reconciliation rules.

B. Enhanced Premium Support Extension

The IR Act extends for an additional three calendar years premium tax credits increased by the ARP. In short, the ARP fully subsidized marketplace benchmark plans for people earning between 100 and 150 percent FPL. It also enhanced credits for people at every income level up to 400 percent FPL, and made people earning above 400 percent FPL newly eligible for premium subsidies by requiring those individuals to contribute no more than 8.5 percent of their household income toward the price of the benchmark plan. The enhanced premium tax credit extension through calendar year 2025 increases government spending by $64 billion, and it will blunt expected premium hikes for this open-enrollment season, which begins right around the mid-term election.

III. Corporate and Individual Tax Changes and Increased IRS Enforcement

To offset the $433 billion price tag, the IR Act includes a number of revenue-raising provisions that collectively generate $451 billion.

A. 15 Percent Corporate Minimum Tax

The IR Act creates a corporate alternative minimum tax (AMT) that imposes a 15 percent minimum tax on adjusted financial statement income for corporations with profits in excess of $1 billion. Corporations would generally be eligible to claim net operating losses and tax credits against the AMT, and would be eligible to claim a tax credit against the regular corporate tax for AMT paid in prior years, to the extent the regular tax liability in any year exceeds 15 percent of the corporation’s adjusted financial statement income. The corporate AMT would be effective for taxable years beginning after December 31, 2022.

Two amendments during the Senate’s vote-a-rama on the IR Act were adopted: one from Sen. John Thune (R-SD) and the other from Sen. Mark Warner (D-VA). All 50 Republicans, Sen. Sinema (D-AZ) , and six other Democrats supported the Thune amendment, cutting language from the 15 percent minimum tax that private equity firms opposed. Specifically, the amendment exempted portfolio companies from the bill’s 15 percent tax. The seven Democrats who supported the Thune amendment also supported the Warner amendment to replace Senator Thune’s offset, which included a one-year extension of the $10,000 state and local tax (SALT) deduction cap.

B. Carried Interest (Removed)

The IR Act attempted to close the carried-interest tax break used by private equity and hedge fund managers to lower taxes. However, on August 5, Sen. Sinema announced she would back the IR Act following a deal to remove the carried interest tax provision.

C. Excise Tax on Stock Buybacks (Added)

To account for lost revenue resulting from removal of carried interest, Sen. Sinema and the Democrats agreed to add a 1 percent excise tax on companies’ stock buybacks, thus raising $74 billion. This provision will generate more revenue than the $14 billion generated from carried interest. Senate Majority Leader Schumer quickly expressed support for this provision, stating that stock buybacks are “one of the most self-serving things corporate America does.”

D. IRS Enforcement

The Internal Revenue Service (IRS) would receive additional money to add auditors, improve customer service and modernize technology. The Congressional Budget Office estimates this will generate $124 billion in tax revenue from increasing tax compliance and modernizing IRS processes.

Feel free to reach out to any of the authors or anyone on the Dentons US Policy Team if you have questions.