The Inflation Reduction Act of 2022 (IRA) was one of the most significant legislative victories of the Biden administration, fostering tens of billions of dollars in planned clean energy investments, much of this yet to be deployed. What will happen to these subsidies next year in the Trump administration?

The IRA will not be repealed

Many believe that Republicans will ultimately decide to leave the IRA largely untouched because most of the investments and jobs spurred by the Act are benefitting traditionally Republican states and constituencies. We believe it is highly unlikely that Republicans will repeal the IRA outright. It is clear that many of the IRA credits, such as those for carbon capture and sequestration, and biofuel and hydrogen production, have sufficient Republican support to survive sweeping repeal efforts. We also believe, however, that other credits such as the consumer EV credit may be at risk, and that many of the credits may be phased-down early, but subject to future extensions by Congress in a manner similar to the days before IRA enactment.

Republicans will find a way to get a tax reform bill to Trump’s desk, but it won’t be easy

With a slim majority in both houses of Congress, the Republicans will be able to move a major tax bill in 2025 through the budget reconciliation process, which they can pass in both houses with simple majority votes. This is virtually a mandate for the Republicans as most of the major provisions of the 2017 Tax Cuts and Jobs Act expire at the end of 2025. We expect this bill to pass Congress and be signed by the President by late 2025. This will not be an easy process, however, since the slim margins in both houses effectively means that nearly every member of Congress has veto power over the bill, and a full extension of TCJA will cost the Treasury roughly $5 trillion relative to budget baseline. While some assume that Republicans will ignore the deficit impact, we think a substantial contingent of the Republicans in Congress will insist that the bill include at least some significant revenue offsets (i.e., revenue increases to balance decreases), including offsets for years beyond the 10 year budget window. Reduction of IRA tax incentives appear to be one of the most likely targets.

The following IRA tax credits are likely to be subject to the most scrutiny, and potential amendments:

• Consumer EV credit and commercial EV credit: total potential offset value over $100 Billion
• Clean electricity ITC and PTC, potential phase-down: potential offset value over $120 Billion
• Clean energy manufacturing production credit, potential reduction/modification: potential offset value over $150 Billion
• Other incentives like clean fuels and hydrogen will likely remain intact, but may be amended with anti-China, pro-US manufacturing provisions.

Without question, there will be fierce lobbying battles over all of these and other energy tax incentives as the debate over the 2025 tax bill plays out in Congress. And no outcome with respect to each credit is preordained.

We are happy to discuss the potential impacts to your business and how we can help you position yourself to mitigate any risks.

Authored by James M. Wickett and Megan Ridley-Kaye.