The IRA: What did Washington do?

This is the first in 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. Part two of this series will deal with income enhancers in the law, while part three will discuss the implications of its health care rules.

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Washington’s Inflation Reduction Act (IRA) has come into force. Despite its name, the legislation makes only half-hearted moves toward controlling inflation. It focuses on Washington’s favorite green initiatives and aims to promote them with a series of grants and loan guarantees as well as tax breaks for individuals and businesses. It extends certain health care benefits to low-income Americans and some low-income Americans. And he aims to pay for it all by raising corporate taxes and using a beefed-up Internal Revenue Service (IRS) enforcement to collect more from everyone.

Federal spending under this act will increase by some $435 billion over the next five years. New taxes and law enforcement, proponents of the law say, will more than offset these expenditures, so budget deficits will shrink over time. This is the official position, but skepticism remains. The administration of the new corporate tax seems so complex that there will be a major slippage in the amount collected, and the $80 billion for IRS enforcement is unlikely to pay for expenses much less a net increase in income. The highly regarded Penn-Wharton budget model determined that the legislation will not have much effect on inflation and provide no deficit relief. Moreover, the Congressional Budget Office (CBO) sees a “negligible effect on inflation” of this legislation and no significant reduction in deficits.

Green initiatives absorb the bulk of legislation spending – 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” in power plants (regardless of energy source). It also offers tax credits and loan guarantees for nuclear power generation as well as “clean vehicles” of all kinds. 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 a similar way. Some $2 billion in direct loans would go towards the construction and modification of electricity transmission facilities. The law permits the transfer of credits to unrelated parties, but only in certain circumstances. It repeals the Trump-era moratorium on offshore wind leases.

The IRA also aims to reduce greenhouse gas emissions by 40% by 2030. This effort gives the Department of Energy (DOE) the authority to advance a range of grants and rebates, as well as direct loans and cooperative agreements to pay 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 to what the legislation calls “environmental justice initiatives” through which it would target benefits in 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 Department of Agriculture would get funding to do the same in agriculture, while automakers would get $6 billion to produce hybrid and plug-in electric vehicles in the United States.

Centralized control is the subject of this part of the legislation. The heads of all the agencies involved have considerable discretion over what activities could be supported and how they might be eligible. In other words, Washington would direct not only the focus on production, but how people can pursue it.

It would seem that in the face of this quest for government command and control, complexity and expense, practical people would prefer something simpler and probably more efficient. A carbon tax would do that. By making the emission of greenhouse gases costly, such a tax would trigger a wide variety of efforts to limit fuel use and emissions. Every American would look for ways to reduce their carbon footprint. Instead of listing the IRA’s favorite technologies and commands on how to use them, this kind of general effort would engage everyone’s imagination. He would also proceed with more vigor than the dictates of the IRA could possibly muster. Moreover, a carbon tax would replace the huge expense of this law with additional revenue, perhaps enough to provide Americans with other needed benefits or even a reduction in other tax burdens. However, Washington is unlikely to consider such an approach. Politicians and bureaucrats love command and control too much.

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