The federal Inflation Reduction Act (IRA), which was signed by President Biden in August, includes $270.7 billion (over the 2022–2031 period) in new and expanded clean energy tax credits. (The cost estimate from the Joint Committee on Taxation is available here.) Notably, most of these tax credits will essentially be refundable for states and local governments and other tax-exempt entities.

Typically, these federal tax credits are nonrefundable. Thus, in order to take advantage of a tax credit, a tax-exempt organization might sell the credits to a third party. As the Congressional Research Service explains, “These transactions involve one party agreeing to assign the rights to claim the tax credits to another party in exchange for an equity investment (i.e., cash financing).”

The IRA effectively makes some of the clean energy tax credits refundable for certain entities. In Sec. 13801 of the bill (page 186 of the pdf), the bill adds a new Sec. 6417 to the Internal Revenue Code. It states that, if they choose to, entities will “be treated as making a payment against the tax . . . equal to the amount of such credit.” Thus, they will receive a refund in the amount of the credit even though they paid no other income tax. Eligible entities are:

• Tax-exempt organizations,
• States and their political subdivisions,
• Indian tribal governments,
• Alaska Native Corporations,
• the Tennessee Valley Authority, and
• Rural electric cooperatives.

The credits that will be refundable for these entities are:

• Renewable electricity credit (Sec. 13101),
• Energy credit (Sec. 13102),
• Carbon oxide sequestration credit (Sec. 13104),
• Zero-emission nuclear power production credit (Sec. 13105),
• Clean hydrogen (Sec. 13204),
• Qualified commercial clean vehicles (Sec. 13403),
• Alternative fuel refueling property credit (Sec. 13404),
• Advanced energy project credit (Sec. 13501),
• Advanced manufacturing production credit (Sec. 13502),
• Clean electricity production credit (Sec. 13701),
• Clean electricity investment credit (Sec. 13702), and
• Clean fuel production credit (Sec. 13704).

(Additionally, taxable entities will also be eligible for the refundable credits through calendar year 2032 for the clean hydrogen credit, the carbon sequestration credit, and the advanced manufacturing credit.)

The Joint Committee on Taxation estimates that the 12 refundable credits will reduce federal revenues by $218.636 billion over the ten-year period. It is not clear how much of that might accrue to entities in Washington.

The National Association of Counties notes that this provision “will allow local governments, public utilities and such entities as electric cooperatives to pursue renewable energy projects on their own, without having to rely on outside financing.”