Will governments figure out the Inflation Reduction Act tax credits?

Tax incentives have long been a favored economic development tool of governments, but do we know how to actually use them ourselves? Well, we’re about to find out.

The Inflation Reduction Act (IRA) deployed billions of dollars of tax incentives to fund clean energy and other green investments. In a history-making move, the bill opened tax credits to governments for the first time. The big question: how do governments — who don’t pay taxes — receive tax credits? 

To solve this paradox, the U.S. Treasury designed a new program titled “elective pay” or “direct pay.” Rather than a credit against income taxes, “direct pay” allows tax-exempt organizations including local, state and tribal governments to be paid “directly.” It requires a pre-registration filing once the project is complete, then submission of an application following the end of the tax year. Governments can receive 30% of the project costs plus a number of bonus credits.

For example, a $100 million investment in solar, wind or geothermal would qualify for $30 million from the Internal Revenue Service. If located in a low-income community (determine your eligibility with the DOE’s map), that could jump to $50 million — practically a BOGO-like deal! 

Elective vehicle purchases, charging infrastructure, rooftop solar panels, and many other green investments qualify for direct pay. This presents a potential windfall that slashes costs for important climate projects. So why isn’t every finance officer talking about this?

First, “direct pay” has not been marketed enough; and second, the process remains complicated and confusing. Each type of tax credit has different restrictions. Some are eligible for “direct pay” and some not. Many require domestically sourced materials, though exemptions are available. Requirements differ for projects started before 2024, during 2024, and after 2024, and on and on. 

Basically, we’re building the plane as we fly it. Treasury has energetically worked to propose new rules and release guidance for this daunting regulation. It has clearly taken a herculean effort, for which Treasury deserves commendation. Unfortunately, a mountain of complicated information has fallen upon local government officials sadly ill-equipped to digest it. 

And yet, for the sake of public investment, we have to make it work. Troves of money await the governments willing to act. How many of us have mandates to transition to electric vehicles or achieve net zero emissions? The IRA tax credits can make it happen.

Here are four simple steps to get started:

1. Review the IRS’ guidelines on Elective/Direct Pay and which types of projects qualify.
2. Watch the pre-filing registration video to learn about the application process
3. Identify existing and potential projects with tax-credit eligibility
4. Determine if current legal or audit resources have capability to provide tax guidance and support tax-credit applications; or if these services need to be procured 

The IRA may appear confusing right now, but hopefully a year from now governments across the country will be filing for millions of dollars of tax credits. With every challenge comes an opportunity, and public finance officials — with help from our private sector partners — can make huge strides in meeting climate goals if we devote the time and effort to becoming experts in this new tool.
The time to start learning is now.

Kevin Bain is the Director of Strategy for the City of Detroit Treasury and Vice-Chair of the GFOA’s Capital Planning & Economic Development Committee.