On Tuesday, the 16th, President Biden signed the Inflation Reduction Act into law. The wide-reaching law will impact many industries. The law has three primary segment objectives: lowering healthcare costs, reducing energy prices, and decreasing government deficit. The most substantial impact will be on the renewable energy and clean tech industries. The sector will receive an injection of almost $370 billion spread across various outlets to tackle climate change and reduce energy pricing. While the law encompasses a broad spectrum, two key elements will have a lasting effect on our economy: clean energy tax credits and residential energy efficiency.
The clean energy tax credit program makes money available to citizens and corporations. The overall goal is to incentivize and expedite the green transition. While there is a long list of tax credits in the bill, the most notable are the clean vehicle tax credits and the investment and production tax credits.
Clean vehicle credits aim to get more people into electric vehicles (EVs). The credit is still $7,500 but has been revamped and expanded. The previous legislation capped the number of buyers who could receive the credit at the first two hundred thousand purchases from each manufacturer. These caps will phase out, so buyers of popular makes like Tesla and GM are again eligible for the credit. Furthermore, the credit has been extended to used vehicles. Buyers looking into used EVs can now enjoy a tax credit of up to $4,000 on their purchase. As a caveat, the final assembly of the vehicle must be in the US, and there are limitations to upstream component sourcing. For more in-depth details of navigating the EV tax credit read our recent blog post.
Investment and production tax credits are also poised to have an outsized impact. Operators of power generation plants can receive tax credits for investment in new green energy production methods and incremental credits for clean energy produced. This is a significant incentive for operators to implement clean energy solutions. The bill aims to generate long-term energy savings to be passed downstream to the customers they serve. If the credits work as designed, they will cover sizeable portions of the enormous investments required to make parts of our economy and infrastructure compatible with clean energy, avoiding probable transitionary price increases.
Residential energy efficiency incentivizes homeowners to make updates to their homes that are aimed at reducing electricity usage. This credit has a broad spectrum of applications. Homeowners can receive credit for introducing a clean energy system like residential solar or making energy efficiency upgrades like windows, insulation, or water heaters. Introducing a new clean energy system provides the largest credit, granting the owner a tax reduction equal to 30% of the project total. Doors, windows, and other improvements have dollar value caps but can still provide substantial credits toward project costs. Additionally, the previous lifetime cap on credits has been removed and replaced with an annual cap of $1200, providing homeowners the option to periodically benefit from improving their homes.
The Inflation Reduction Act will introduce a wide array of measures intended to reduce both costs and greenhouse gas emissions. It is widely debated what the impact will be on inflation and how effective the bill will be on reducing emissions. All said, with the new tax incentives, it is an opportune time to get into a new EV or make those postponed home improvements.
