Special Briefing: The Inflation Reduction Act: Investment Opportunities and Challenges

Inflation Reduction Act May Transform Infrastructure Finance

By Stephen Kleege, Volcker Alliance Special Project Consultant

• The Inflation Reduction Act said to create more than 9 million jobs over next decade
• Direct pay subsidies will empower local governments in implementing climate action 
• Act may shift $4 trillion municipal market from tax-exempt debt to direct pay financing

The Inflation Reduction Act of 2022 (IRA) will create millions of jobs, fuel investment in clean energy and transportation, and may change the face of the $4 trillion municipal bond market, according to panelists at a Special Briefing hosted by the Volcker Alliance and Penn Institute for Urban Research.

The IRA has been “hailed as the most important climate change act in US history,” said Penn IUR Co-Director Eugénie L. Birch, who moderated the October 20 webinar with William Glasgall, Volcker Alliance senior director, public finance, and Penn IUR Fellow. “This puts us back among the important players in the global arena around the Paris agreement in sustainability,” Birch said.

The briefing was the thirty-fifth in a series of sixty-minute online conversations featuring experts from the national research networks of the Volcker Alliance and Penn IUR, along with other leading academics, economists, and federal, state, and local leaders. The panel included Ben Beachy, vice president of manufacturing and industrial policy at the BlueGreen Alliance; Sarah Gimont, associate legislative director for environment, energy and land use policy, National Association of Counties; Justin Marlowe, research professor, University of Chicago Harris School of Public Policy; and Richard Prisinzano, director of policy analysis, Penn Wharton Budget Model, the Wharton School, University of Pennsylvania.

The IRA was signed into law by President Joe Biden in August. It raises taxes, increases spending on climate measures, expands health care coverage, allows Medicare to negotiate drug prices, and provides for $265 billion in deficit reduction, according to the Penn Wharton Budget Model. Prisinzano estimated the act would reduce gross domestic product annually by 0.1 percent annually initially and increase it by 0.1 percent after fifty years. 

Though the law is called the Inflation Reduction Act, Prisinzano said that “our modeling and analysis basically says it has no meaningful effect on inflation.” He said tax increases would fall mostly on higher-income Americans, in line with Biden’s promises. The Penn Wharton budget model estimates the tax paid in 2023 by people in the bottom quintile in income will rise by an average of $5, compared with an average increase of $61,250 for taxpayers in the top 0.1 percent.

“This law could be a game changer,” said Ben Beachy of the BlueGreen Alliance, a coalition of union and environmental groups. “The Inflation Reduction Act includes many of the investments that we and our allies have been fighting for years.” 

The bill’s climate and energy investments will create more than nine million good jobs over the next decade, he said, citing economists at the University of Massachusetts Amherst’s Political Economy Research Institute. That figure represents the gross number of jobs created rather than a net increase, he said, noting the bill provides incentives to support energy communities, including those have historically been reliant on coal. 

As part of the federal government’s effort to reduce greenhouse gas by 40 percent, the law offers a direct pay option in lieu of clean energy tax credits, which let non-taxable entities benefit from the federal support. The law provides two alternatives to monetizing credits through the traditional tax equity investment structures, according to BakerHostetler. The first allows non-taxable entities to receive a “direct pay” cash payment in the form of a tax refund from the federal government. The second allows entities to sell or transfer credits to third parties.

“The direct pay option really puts counties in the driver’s seat when it comes to making decisions about their own energy sources, resiliency and sustainability of their communities, and participating in the energy transition as a whole,” Gimont said.  

The bill’s use of tax credits and direct pay subsidies also may lead to a shift in the way municipalities finance new infrastructure, especially if the use of the financing tool expands beyond the clean energy space to transportation and building projects, Marlowe said. 

“One of concerns that comes up, is that any time we have direct pay we then have to be concerned about whether Congress is willing to continue to appropriate the support for that direct pay option,” Marlowe said. He said deficit hawks in Congress have periodically targeted the subsidies for Build America Bonds, which were created to spur local spending on infrastructure and boost the economy in response to the Great Recession of 2007-09. 

“If we go this route,” Marlowe said, “can we get to critical mass, so we have enough support, enough entities using this structure, that we don’t have to be concerned with the federal government creating the kind of uncertainty that we’ve had in the past?” 

Special Briefings are made possible by funding from The Century Foundation, the Volcker Alliance, and members of the Penn IUR Advisory Board.

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