February 3, 2023

Inflation Reduction Act of 2022: New Incentives for State and Local Government Clean Energy Infrastructure Projects

Direct Payments for Clean Energy Projects. Prior to the enactment of the Inflation Reduction Act of 2022 (Pub. L. 117-169) (the “IRA”), state and local governments did not have access to various federal tax credits available for clean energy projects, as these tax credits could only be utilized by entities that pay federal income taxes.  A key provision in the IRA makes state, local governments, 501(c)(3) nonprofit organizations, tribal governments and other tax-exempt entities (“tax-exempt entities”) eligible to receive a number of clean energy federal tax credits as direct payments.  Other provisions allow tax-exempt entities to combine direct payments with tax-exempt bonds to fund clean energy infrastructure projects, with a relatively minor (15%) reduction in the direct payment.  Local governments and other tax-exempt entities considering clean energy infrastructure projects may wish to compare the range of financing options now available for these projects to determine which option provides the deepest federal subsidy: (1) tax-exempt financing, (2) federal direct payments at the 100% level, or (3) tax-exempt financing combined with federal direct payments at the 85% level.

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