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What is the Inflation Reduction Act?

Credit: The White House | Flickr – Pres. Joe Biden signs H.R. 5376, the "Inflation Reduction Act of 2022"

The Inflation Reduction Act (IRA) was signed into law in August 2022 and represents the U.S. government's latest attempt to increase federal spending on efforts to reduce carbon emissions, lower healthcare costs, and provide funding to the Internal Revenue Service to improve its taxpayer-compliance programs. The primary goal of the IRA, and its $500 billion-dollar budget, is to facilitate the development of the United States’ domestic-manufacturing capacity and to encourage the research and development of cutting-edge technological capabilities, specifically clean-hydrogen and carbon-capture technologies.

Approximately $400 billion of the federal funding is directed toward clean energy, transmissions, clean transportation, and electric-vehicle incentives. These funds will be distributed through tax incentives, grants, and loan guarantees.

Corporations will be the biggest recipients and are slated to receive an estimated $216 billion in tax credits. These tax credits will facilitate corporations’ private investment in clean energy, transportation, and manufacturing. A majority of the tax incentives are direct pay, meaning the IRA will allow a corporation to claim the total amount of the tax credit even when its overall tax liability is less than the total credit amount.

Under the IRA’s manufacturing requirements, corporations will only be eligible for its tax incentives if they satisfy wage and apprenticeship requirements. Many of these tax incentives also contain "scaling domestic-production or domestic-procurement requirements." To access the total value of the IRA’s electric vehicle (EV)-consumer credit, corporations must have a

“scaling percentage of minerals in their batteries that are either recycled in North America or extracted or processed in a country with a free-trade agreement with the United States”

and requires the battery to be constructed, through either manufacture or assembly, in the United States. Id.

The IRA will also raise the minimum tax on large corporations to fifteen percent, create a one-percent excise tax on stock buybacks, and increase IRS collection and enforcement abilities through increased funding. The Congressional Budget Office believes that by using these techniques the IRA will lower government deficits by an estimated $237 billion over the next decade.

How are companies taking advantage of the IRA?

The incentives provided by the IRA appear to be enticing for major corporations looking to increase their investments in EVs and green energy. Companies such as LG and Ford are committing to spending billions on factories that produce batteries in the U.S. LG is investing $5.5 billion on a plant outside of Phoenix, Arizona, which is planned to begin operations on EV batteries by 2025, and expand operations to include other energy storage systems in 2026. Ford plans to spend $3.5 billion on a factory for EV batteries in Marshall, Michigan. Volkswagen has overhauled their factory in Chattanooga, Tennessee, for the purpose of increasing their production of EVs in North America. This action is part of Volkswagen’s commitment to making one in every five Volkswagen sales an EV sale by 2025. The actions of these corporations demonstrate that major producers of batteries and electric vehicles are willing to invest heavily in domestic production due to the IRA.

What are the potential impacts of these investments?

This increase in domestically produced electric-vehicle batteries, combined with a recent decrease in the price of the lithium required to manufacture them, shows potential for a substantial decrease in the total price of EVs. The effects of decreased lithium costs have already been reflected in the recent drop in the price of Teslas (link to SCBC article on Tesla price drops from this issue). Domestically produced batteries will also reduce costs by reducing the transportation costs associated with battery production. EV-battery production generally begins with the mining of raw materials in Australia or The Democratic Republic of the Congo, before the materials are shipped to China to be processed into batteries. The final-form batteries are then shipped to the United State for installation in the already-assembled vehicles. This multi-stage shipping process further increases the production cost. Cutting back on half of that process allows manufacturers to pass those savings to consumers. By decreasing the costs of electric vehicles, the United States can further decrease its carbon footprint by increasing the number of zero-emission vehicles on the road. The IRA has demonstrated that decreases in electric-vehicle prices and decreases in carbon footprint are on the horizon.

*The views expressed in this article do not represent the views of Santa Clara University.


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