Combat the Inflation Reduction Act’s Central Planning

COMMENTARY Budget and Spending

Combat the Inflation Reduction Act’s Central Planning

Jan 24, 2023 7 min read

Commentary By

Richard Stern

Acting Director, Hermann Center for the Federal Budget

Daren Bakst @darenbakst

Senior Research Fellow, Environmental Policy and Regulation

President Joe Biden signs The Inflation Reduction Act in the State Dining Room of the White House August 16, 2022 in Washington, D.C.  Drew Angerer / Staff / Getty Images

Key Takeaways

This sweeping legislation was jammed through Congress on a purely partisan basis through the budget reconciliation process to bypass the Senate filibuster.

It is yet another example of irresponsible government spending and taxation that will exacerbate inflation, which is already at levels not seen in 40 years.

This dangerous path needs to be blocked and conservatives should make it perfectly clear that the IRA is not the new normal.

On August 16, 2022, President Joe Biden signed the so-called Inflation Reduction Act (IRA) into law. This sweeping legislation was jammed through Congress on a purely partisan basis through the budget reconciliation process to bypass the Senate filibuster. Not a single Republican in the House or Senate voted in favor of its passage.

Over the next 10 years, the IRA will likely increase federal deficits and increase taxes by $570 billion, according to calculations from The Heritage Foundation—with the average middle-income family seeing a tax hike of more than $2,400. It is yet another example of irresponsible government spending and taxation that will exacerbate inflation, which is already at levels not seen in 40 years.

A central aspect of the IRA is the litany of “Green New Deal” policies that use government intervention to influence how energy is produced and consumed in the United States. The law diverts taxpayer dollars into unreliable electricity sources, like solar and wind, while sending a clear signal that reliable electricity sources, like natural gas, are disfavored. The law aggressively uses the levers of government to influence what vehicles Americans drive, getting them out of gas and diesel-powered vehicles and into electric vehicles (EVs), and even pushes consumers away from natural gas appliances to electric appliances.

These are just some examples of the IRA’s climate and energy provisions, estimated to cost $369 billion over the next 10 years. This cost is only part of the picture. The subsidies and other governmental intervention will be used to tip the scales and leverage the transition of investment dollars out of productive enterprises and into those that are inefficient, yet politically favored.

Lawmakers supporting the bill have apparently decided that to achieve their vision for a “clean energy” future, they should engage in one of the most heavy-handed central planning campaigns in American history.

For conservatives and anyone concerned with the radical energy provisions in the law, including its effort to push inefficient and unreliable electrification, the key question is: what should be done to undo the damage this law will create? These provisions are not merely troubling due to their costs.

In fact, more important by far is how the new law could set up a permanent path away from having access to the affordable energy necessary for prosperity and the freedom Americans expect and deserve. This dangerous path needs to be blocked and conservatives should make it perfectly clear that the IRA is not the new normal. It is instead an aberration that will be dismantled in favor of policy that recognizes the critical importance of affordable and reliable energy and freedom.

Climate and Energy Provisions in the IRA

The “green” provisions within the IRA are the major component of this law, and include numerous grants, tax credits, loans, and other government meddling into energy production and usage. The following are just some of these egregious provisions:

The “Greenhouse Gas Reduction Fund.” The Environmental Protection Agency (EPA) has $27 billion to spend until September 30, 2024 to hand out allegedly “competitive” grants on, among other things, financial and technical assistance for projects that reduce or avoid greenhouse gas (GHG) emissions and the deployment of zero-emission technologies. This massive influx of money affords the EPA wide discretion in how to spend the money and who it should fund. As a result, it is ripe for abuse.

The EV Push. Despite decades of subsidies, according to Department of Energy data, electric vehicles constituted only 0.5 percent of all vehicles registered in 2021. EV sales in 2021 accounted for fewer than 5 percent of overall vehicle sales. The vehicles have numerous problems, including limited range and higher costs than gas-powered cars, and are typically purchased by wealthy households. The reality is most Americans rely on gasoline to power their cars.

Yet, the IRA goes all in on EVs to help change the vehicle fleet, regardless of the effect on the electricity grid or basic respect for allowing Americans to choose freely what vehicles to drive. The legislation includes EV tax credits and grants to retool auto manufacturing plants to manufacture clean vehicles and up to $20 billion in loans to build “clean vehicle” manufacturing facilities. Subsidies for so-called “clean vehicles” represent a blatant wealth redistribution from low- and middle-income families to the wealthy. These programs will pay automakers to stop producing reliable and affordable cars. This will add to the financial burdens of most Americans in order to subsidize the corporate interests taking advantage of this “green” agenda.

Agricultural Practices. The bill would provide more than $20 billion to support “climate-smart agricultural practices,” with funding going to five U.S. Department of Agriculture (USDA) conservation programs. The USDA has indicated that the money for the conservation programs will help farmers implement conservation practices to reduce GHG emission. This is yet another step by some policymakers to push specific agricultural practices onto American farmers.

Punishing Conventional Fuel. The IRA is not all carrots. When it comes to disfavored energy sources, it brings out the sticks. For example, the legislation would increase the costs for oil and gas drilling by increasing the royalties companies have to pay for offshore drilling from 12.5 percent to 16.66 percent (and as high as 18.75 percent), and for onshore oil drilling from 12.5 percent to 16.66 percent. It also includes a methane emissions fee for petroleum and natural gas companies. Unavoidably, these costs will be borne by the American people through slower wage and economic growth and higher consumer prices.

How to Counter the IRA

The next Congress will see divided government, making it difficult for legislators who opposed the IRA to undo the law. However, conservatives should not lose sight of the critical need to fully repeal the IRA and take whatever steps they can to make this happen. In the short-term, there may not be significant results, but taking action now can help set the stage for bigger changes to come.

From the outset, conservatives should make it perfectly clear to those who are pushing these misguided policies, including this national electrification plan, that these policies will be short-lived. For those who seek to financially benefit from this plan, they should know they rely upon these ill-gotten subsidies at their own peril. For firms receiving the IRA “green” subsidies, they should know the spigot will be turned off as soon as conservatives control the government.

Conservatives should make it clear that they will not support bailouts for businesses that change their practices to chase federal subsidies, such as by expanding the production of EVs, while significantly reducing the manufacture of gas-powered vehicles. Conservatives should stress that they will not support the government being complicit in fostering corporate cronyism and increasing energy and transportation costs for Americans. Plus, there will absolutely be no bailouts for other businesses that put most or all of their eggs in the “green” electrification basket.

At the start of the 118th Congress, conservatives should pass a resolution codifying some basic principles. For example, they should state that:

Affordable and reliable energy should be a top priority. The federal government should remove government-created obstacles to achieving this goal and unleash America’s energy potential.

The government will not pick winners and losers when it comes to energy, nor will it intervene to try to influence or dictate how energy is produced or consumed.

American families rely upon affordable energy, and policies that drive up energy prices hurt Americans and are regressive, therefore especially hurting lower-income households.

Oversight

Proper oversight of the IRA’s implementation must be a top priority. This will include hearings and doing what is necessary to promote transparency. However, a congressional check on how the IRA is implemented should not stop there. Conservatives should pass legislation to require that “slush funds” ripe for abuse like the EPA GHG fund cannot give out money prior to congressional review and approval. This goes beyond simply protecting against abuse. The law’s sweeping delegation of spending authority is problematic from a separation of powers perspective.

In terms of how the money is spent, there must be clear and detailed legislative prohibitions on conflicts-of-interest and using any of the money to assist nonprofits (or others) for litigation or lobbying of any kind. The IRA’s hypocrisy is evident in the pro-labor union provisions within the legislation that come at the expense of the alleged “green” agenda. For example, many of the law’s tax credits provide a 5-fold increase in the size of the credit for firms that comply with specific parameters. These favors to unions should be repealed.

The burdens of the numerous federal favors within the IRA will fall on the American people. The volume of spending and tax increases of this law will add to the financial hardships of Americans and the precarious fiscal position of the federal government.

Unfortunately, some of the money will be effectively “out the door” even at the start of 2023. However, conservatives should do what they can to block the distribution of even previously appropriated money if it has not been spent yet.

Funds that have been appropriated and not spent exist only as a credit allowance for a particular federal program – that credit limit can always be rescinded. In the case of the IRA, a conservative Congress should use its power of the purse to demand that unspent budget authority from the IRA be rescinded. Congress should ensure that, at a minimum, funding levels that are not rescinded should have guardrails put up to limit their use and scope. Congress must ensure transparent and proper reporting and hearings on these funds before they go out the door.

Most of the IRA’s green spending is not expected to go “out the door” until 2025 and later. If conservatives do have a better governing position at that time, then they quite simply should repeal the IRA. Just as the IRA itself was created through a budget reconciliation process, repeal of the law could be as well.

Conclusion

The best way to undo the IRA is a fluid question the answer to which will change depending on numerous factors, but the goal of getting rid of this bad policy is not fluid. Tomorrow, like today, the IRA will be misguided and arrogant policy that presumes government should dictate energy production and consumtion.

As time passes, there may be some of today’s opponents of the IRA who will just surrender and look to fight new battles. Energy is simply too important though for Americans and across the economy to allow the IRA to stand.

Conservatives should recognize that unless the IRA is dismantled and its approach to energy policy firmly rejected, the path the Democrats set through their bill will have negative consequences until the course is reversed. This is a pivotal moment for our nation’s prosperity and the freedom of its people. Conservatives need to fight and get this nation back on a course of energy abundance and, as a result, a path to a flourishing and innovative future.

This piece originally appeared in Jewish Policy Center, Winter 2023