House Republicans on April 26 approved legislation on a party line vote a bill that would rescind many clean energy tax incentives from the Inflation Reduction Act (IRA) in exchange for a temporary increase in the federal debt limit. A new analysis from the Tax Policy Center finds that repealing those tax breaks would reduce after-tax income in 2024 by an average of 0.2 percent ($810) for those in the top 20 percent of earners (who earn at least $195,000 a year), while low- and middle-income households would face smaller increases.
IRA corporate and individual income tax breaks benefit both producers and consumers of clean energy products. They apply to investments in solar and wind power, energy-efficient home improvements, and other carbon reduction activities. He projected cost of these incentives has grown substantially since the Congressional Joint Committee on Taxation last noted the GONNA last year.
In the Limit, Save, Grow Act, House Republicans would leave intact the IRA’s incentives for biofuels and carbon sequestration. TPC also did not include in its analysis the repeal of tax exemptions for the purchase of electric vehicles, since JCT has not completed a revenue estimate for that provision.
Under the bill, the top 1 percent of taxpayers (with incomes of about $1 million or more) would see their after-tax income drop by 0.3 percent ($6,400) on average in 2024. The 0 The top 1 percent of taxpayers (with incomes greater than $4.3 million) would face the largest increase in the tax burden: Their after-tax income would fall by an average of $31,700 in 2024.
The bottom two income quintiles (those making less than $30,000 or $60,000) would see smaller increases, and the average household in those groups would see a decrease in after-tax income of about 0.1 percent ($40 or less).
The tax burden of repealing the incentives would grow in 2027, particularly for the wealthy. For the top 1 percent, after-tax income would drop by an average of $11,700 (0.5 percent), and the top 0.1 percent would see an average tax increase of $55,700 (0.6 percent). These estimates account for the proposed repeal of corporate and individual income tax incentives. Tables only on the effect of repealing non-corporate incentives are available here for 2024 and here for 2027.
Balancing progressive taxation with climate action
The political dynamic here is unusual. Republicans typically oppose legislation that counts as a tax increase, which my colleague Howard Gleckman explores here.
Meanwhile, while the tax increases in this measure are skewed toward the wealthy, President Biden and Senate Democrats have said the IRA isn’t going anywhere and more negotiations will be required.
On the Democratic side, tax breaks are more than revenue. The primary goal is to reduce greenhouse gas emissions in the US to help slow climate change. TPC’s tax model does not assess these effects. However the rhodium group and resources for the future have previously estimated how the IRA could reduce emissions as well as lower energy costs and other goods and services that would benefit household finances.
The renewed debate on clean energy subsidies provides an opportunity to review whether a carbon tax could achieve many of the same policy goals without increasing federal deficits. Although politically challenging, a carbon tax has efficiency advantages and, as previous TPC analysis has shown, could be somewhat progressive if combined with a rebate or dividend.
Other considerations
The Limit, Save, Grow Act would also make substantial cuts in federal spending, which TPC does not review. For example, the legislation would implement stricter work restrictions for Medicaid and the Supplemental Nutrition Assistance Program. He Congressional Budget Office recently estimated that Medicaid work requirements would save the federal government about $109 billion. However, CBO also said it would increase the number of people without health insurance by 600,000 and impose additional health care costs on states to offset reduced federal support.
In all, the House Republican plan would reduce deficits by about $4.5 trillion over the next decade. While the clean energy tax breaks are only part of the bill, their repeal would generally be phased-in.
As Democrats strongly oppose backing down on broader emissions targets and House Republicans plan to push for more individual and corporate tax cuts this year, this debate and negotiations on preventing a catastrophic debt default are just beginning.