The Inflation Reduction Act: Provisions And Incentives For Local Governments – Government Contracts, Procurement & PPP

Highlights

• President Joe Biden signed the Inflation Reduction Act of 2022
  (IRA) into law on Aug. 16, 2022 – the result of many months of
  negotiations among Democrats to advance some of President
  Biden’s highest policy priorities.




• The IRA will reduce the deficit and makes major investments in
  healthcare, domestic energy production and manufacturing and
  climate change.




• This Holland & Knight alert breaks down some of the
  provisions and incentives that will benefit local governments
  across the nation.

President Joe Biden signed the Inflation Reduction Act of 2022
(IRA) into law on Aug. 16, 2022, following its passage along party
lines in the U.S. Senate and House of Representatives. The
comprehensive legislation is the result of many months of
negotiations among Democrats to advance some of President
Biden’s highest policy priorities.

The IRA will reduce the deficit and make major investments in
healthcare, domestic energy production and manufacturing, and
climate change. This Holland & Knight alert breaks down some of
the IRA provisions and incentives that will benefit local
governments across the nation, with a comparison to similar
programs offered by the Infrastructure Investment and Jobs Act
(IIJA).

Funding Opportunities

U.S. Forest Service (USFS)

1. State and Private Forestry Conservation
   Programs ($2.2 billion)
   

   1. The IRA will provide $700 million for the Forest Legacy Program
      (FLP) to provide grants to states to acquire land and interests in
      land.

   
   

   2. The IRA will provide $1.5 billion for the Urban and Community
      Forestry Assistance Program, funding multiyear grants to state
      agencies, local governments, tribes or nonprofits for tree
      planting.

U.S. Environmental Protection Agency (EPA)

1. Greenhouse Gas Reduction Fund ($27 billion)
   

   1. The IRA will provide $27 billion to establish a new Greenhouse
      Gas Reduction (GHG) Fund to invest in nonprofit, state and local
      financing institutions designed to rapidly deploy low- and
      zero-emission technologies by leveraging investment from the
      private sector. Projects funded under this program must reduce air
      pollution by reduction or avoidance of GHGs.

   
   

   2. The IRA requires that least 40 percent of benefits go to
      low-income and disadvantaged communities to deploy or benefit from
      zero-emission technologies, including distributed technologies on
      residential rooftops. Direct investments are prioritized for
      projects that would otherwise lack access to financing and that can
      ensure continued operability by monetizing repayments and revenues
      for other financial assistance.

2. Clean Heavy-Duty Vehicles ($1 billion)
   

   1. IIJA: EPA Clean School Bus Program: $5 billion

   
   

   2. The IRA will provide $1 billion to establish a program to make
      grant and rebates to states, local governments and nonprofit school
      transportation associations to replace Class 6 and Class 7
      heavy-duty vehicles with zero-emission vehicles.

   
   

   3. Funding could also be used to purchase, install, operate and
      maintain the infrastructure needed to charge, fuel or maintain
      zero-emission vehicles; for the workforce development and training
      to support the maintenance, charging, fueling and operation of the
      zero-emission vehicles; or to plan and provide technical assistance
      to support zero-emission vehicle adoption and deployment.

   
   

   4. The bill requires that 40 percent of funding ($400 million) be
      directed to recipients proposing to replace eligible heavy-duty
      vehicles serving communities located in nonattainment areas (i.e.,
      areas with high air pollution).

3. Grants to Reduce Air Pollution at Ports ($3
   billion)
   

   1. IIJA: DOT Reduction of Truck Emissions at Port Facilities:
      $400 million

   
   

   2. IIJA: DOT/MARAD: Port Infrastructure Development Program:
      $2.25 billion

   
   

   3. The IRA will provide $3 billion to establish a program to award
      grants and rebates for the purchase and installation of
      zero-emission equipment and technology at ports as well as the
      development of climate action plans at ports.

   
   

   4. Eligible funding recipients are a port authority; a state,
      regional, local or tribal agency with authority over a port
      authority; or an air pollution control agency. Private entities may
      apply in partnership with the aforementioned eligible
      recipients.

   
   

   5. The bill allocates 25 percent of the funding ($750,000) for
      investments made at ports in nonattainment areas.

4. Climate Pollution Reduction Grants ($5
   billion)
   

   1. IIJA: DOT Carbon Reduction (formula): $6.419
      million

   
   

   2. The IRA will provide $5 billion as follows:
      

      1. $250 million for grants for the costs of developing plans to
         reduce GHG air pollution and directs the EPA to make such a grant
         to at least one state, air pollution control agency, municipality
         or tribe in each state. Each plan must include programs, policies,
         measures and projects that will achieve GHG air pollution
         reduction.

      
      

      2. $4.75 billion for the EPA to competitively award grants to
         implement GHG air pollution reduction plans. To apply for a grant,
         applicants must include information regarding the projected
         reduction of GHG air pollution reductions, including in low-income
         and disadvantaged communities in its plan.

5. Low-Emissions Electricity Program ($87
   million)




6. 1. The IRA will provide $87 million to EPA via the following
      investments:

   
   

   2. 1. $17 million to educate consumers on GHG emissions that result
         from domestic electricity generation and use

      
      

      2. $17 million to educate and provide technical assistance to
         low-income and disadvantaged communities on GHG emissions that
         result from domestic electricity generation and use

      
      

      3. $17 million to educate and provide technical assistance to
         industry on GHG emissions that result from domestic electricity
         generation and use

      
      

      4. $17 million to educate and provide technical assistance to
         state, tribal and local governments on GHG emissions that result
         from domestic electricity generation and use

      
      

      5. $1 million to evaluate GHG emission reductions anticipated to
         occur over the next 10 years as a result from the aforementioned
         education initiatives

      
      

      6. $18 million to ensure the assessed reductions are achieved

6. Environmental and Climate Justice Block Grants
   ($3 billion)
   

   1. The IRA will provide $3 billion to establish a program to
      provide grants that invest in community-led projects in
      disadvantaged communities and community capacity building centers
      to address disproportionate environmental and public health harms
      related to pollution and climate change.

   
   

   2. Eligible funding recipients will be community-based nonprofits
      or organizations, or a partnership between community-based
      nonprofit organizations and a tribe, a local government or an
      institution of higher education.

   
   

   3. Eligible activities include:
      

      1. community-led air and other air pollution monitoring,
         prevention and remediation, investments in low- and zero-emission
         and resilient technologies and workforce development that help
         reduce GHG emissions and other air pollutants

      
      

      2. mitigating climate and health risks from urban heat islands,
         extreme heat, wood heater emissions and wildfire events

      
      

      3. climate resiliency and adaptation

      
      

      4. reducing indoor toxics and indoor air pollution

      
      

      5. facilitating engagement of disadvantaged communities in state
         and federal public processes

7. Greenhouse Gas and Zero-Emission Standards for Mobile
   Sources: $5 million for EPA to provide grants to states to
   adopt and implement low- and zero-emission standards for mobile
   sources.

8. Funding for Enforcement Technology and Public
   Information ($25 million): The IRA will provide $25
   million, of which $18 million is to update EPA’s Integrated
   Compliance Information System (ICIS) and other technology
   infrastructure; $3 million for grants to states, tribes and air
   pollution control agencies to update their systems; and $4 million
   to acquire and update inspection software used by EPA, states,
   tribes and air pollution control agencies.

U.S. Department of Energy (DOE)

1. Assistance of Latest and Zero Building Energy Code
   Adoption ($1 billion)
   

   1. IIJA: DOE Building Codes Implementation for Efficiency and
      Resilience: $225 million

   
   

   2. IIJA: DOE Energy Efficiency Revolving Loan Fund
      Capitalization Grant Program: $250 million

   
   

   3. The IRA will provide $1 billion to support state and local
      governments to adopt updated building codes, broken down as
      follows:
      

      1. $330 million to DOE to support states and local communities to
         adopt updated building energy codes for residential and commercial
         buildings, or to implement a plan to achieve full compliance,
         including training and enforcement programs. Residential buildings
         must meet or exceed the 2021 International Energy Conservation Code
         (IECC) or achieve equivalent or greater energy savings. Commercial
         buildings must meet or exceed the ANSI/ASHRAE/IES Standard
         90.1-2019 or achieve equivalent or greater energy savings.

      
      

      2. $670 million for DOE to support grants for states and local
         governments to adopt building codes that meet or exceed zero energy
         provisions in the 2021 IECC or an equivalent stretch code and
         implement a plan to achieve full compliance, including training and
         enforcement

2. Grants to Facilitate the Siting of Interstate
   Electricity Transmission Lines ($760 million)
   

   1. IIJA: DOE Preventing Outages and Enhancing the Resilience
      of the Electric Grid Grants: $5 billion

   
   

   2. IIJA: DOE State Energy Program: $500 million
      

      1. The IRA will provide $760 million to issue grants to siting
         authorities, including state, local or tribal governmental
         entities, for the purpose of:
         

         1. studying and analyzing the impacts of covered transmission
            projects

         
         

         2. examining up to three alternate transmission siting corridors
            participating in regulatory proceedings

         
         

         3. economic development activities for communities that may be
            affected by the construction and operation of a covered
            transmission project

      
      

      2. Transmission lines must be high-voltage interstate or offshore
         electricity transmission lines, proposed to be constructed and to
         operate at least 275 kilovolts (kV) of alternating or direct
         current (or 200 kV for offshore alternating or direct current), and
         must have indicated intent to apply for regulatory approval. To
         receive a grant, the siting authority must agree to reach a final
         decision on the application no later than two years after the grant
         is authorized. Cost share is 50 percent.

U.S. Department of Transportation (DOT)

1. Neighborhood Access and Equity Grant Program
   ($3 billion)




2. 1. IIJA: DOT Reconnecting Communities: $1 billion

   
   

   2. The IRA will provide $3 billion to the Federal Highway
      Administration (FHWA) to support neighborhood equity, safety and
      affordable transportation access with competitive grants to
      reconnect communities divided by existing infrastructure barriers,
      mitigate negative impacts of transportation facilities or
      construction projects on disadvantaged or underserved communities;
      and support equitable transportation planning and community
      engagement activities.

   
   

   3. Eligible funding recipients are a state, unit of local
      government or metropolitan planning organization (MPOs).

2. Low-Carbon Transportation Materials Grants ($2
   billion): The IRA will provide $2 billion to FHWA to reimburse or
   provide incentives to state, local governments and MPOs for the use
   of low-embodied carbon construction materials and products in
   projects.

3. Alternative Fuel and Low-Emission Aviation Technology
   Program ($300 million)
   

   1. The IRA will provide $300 million to establish a competitive
      grant program for projects that develop, demonstrate or apply
      low-emission aviation technologies; or produce, transport, blend or
      store sustainable aviation fuels (SAF), including:
      

      1. $244.53 million for production, transportation, blending and
         storage of SAF

      
      

      2. $46.53 million for low-emission aviation technologies

      
      

      3. $6 million for administration and oversight

   
   

   2. Eligible entities include states or local governments; air
      carriers; airports higher education  research institutions;
      entities that produce, transport, blend or store SAF in the U.S.;
      and entities engaged in research, development and demonstration of
      low-emission aviation technologies or nonprofits. Cost share is 25
      percent for entities except small hub or nonhub airports, for whom
      the cost share is 10 percent.

   
   

   3. DOT must consider
      

      1. the capacity for the entity to increase domestic production of
         SAF

      
      

      2. projected GHG emissions on a lifecycle basis

      
      

      3. job creation and supply chain partnership opportunity

      
      

      4. for SAF, GHG emissions on a life-cycle basis, including
         feedstock and fuel production as well as direct and indirect land
         use change (must demonstrate at least a 50 percent GHG reduction
         utilizing either GREET or ICAO models)

      
      

      5. benefits of ensuring a diversity of feedstocks for SAF,
         including the use of waste carbon oxides and direct air
         capture

   
   

   4. Directs DOT to adopt a Life Cycle Analysis (LCA) model for GHG
      emissions within two years of bill enactment.

4. Environmental Review Implementation Funds
   ($100 million): The IRA will provide $100 million to facilitate the
   development and review of documents for the environmental review
   process for proposed projects for state, local governments and
   MPOs.

U.S. Department of Commerce/National Oceanic and Atmospheric
Administration (NOAA)

1. NOAA – Investing in Coastal Communities and
   Climate Resilience ($2.6 billion)
   

   1. IIJA: NOAA Coastal Habitat Restoration and Resilience
      Grants for Underserved Communities: $10 million

   
   

   2. The IRA will provide $2.6 billion for NOAA for conservation,
      restoration and protection of coastal and marine habitats and
      resources, including fisheries, to prepare for extreme storms and
      climate change effects, as well as for projects that support
      natural resources to sustain coastal and marine resource dependent
      communities. Funds may take the form of grants, cooperative
      agreements or technical assistance to coastal states, the District
      of Columbia, tribal governments, nonprofits, local governments and
      higher education institutes.

U.S. Department of Housing and Urban Development (HUD)

1. Improving Energy Efficiency or Water Efficiency or
   Climate Resilience of Affordable Housing ($1
   billion) 
   

   1. The IRA will provide $837.5 million to provide loans and grants
      to fund projects targeting affordable housing and improving energy
      or water efficiency, enhance indoor air quality or sustainability,
      implement the use of zero-emission electricity generation,
      low-emission building materials or processes, energy storage,
      building electrification or to address climate resilience.

   
   

   2. Eligible recipients are owners and sponsors of HUD-subsidized
      Section 202, 811, Project-based Section 8, and Section 236
      properties that agree to an extended period of affordability.

   
   

   3. Principal amount of direct loans supported by the program not
      to exceed $4 billion. Funding for related activities, including:
      

      1. $60 million for implementation, including financial reporting,
         research and evaluation and cross-program costs

      
      

      2. $60 million for cooperative agreements administered by the HUD
         Secretary

      
      

      3. $42.5 million for energy and water benchmarking of eligible
         properties (regardless of whether they receive grants), and data
         analysis and evaluation at the property and portfolio level

Tax Incentives

In support of clean energy and combating climate change, the IRA
extends, modifies and enhances many existing tax incentives and
also creates new tax incentives with the same goals. It is
difficult to overstate the breath of these changes and the impact
they will have.

Generally, entities exempt from federal income taxation –
such as local governments – do not benefit from tax
incentives contained in the Internal Revenue Code. The IRA has
changed this dynamic by unlocking the ability to access these tax
incentives. Specifically, under new Internal Revenue Code Section
6417, certain “applicable entities” can elect to be
treated as if they made a payment of tax equal to the amount of an
“applicable credit.” Stated simply, this new section
allows certain entities to ask the Internal Revenue Service (IRS)
for a cash refund in the amount of credit to which they are
entitled, i.e. they can ask the IRS for a direct payment.

As stakeholders await guidance from the IRS on the mechanics of
this new section, first effective in 2023, the ability to seek a
direct payment of tax credits is a sea change for applicable
entities, which includes states and any political subdivision
thereof.

There are 12 applicable credits under the IRA that can be
elected for direct pay by applicable entities.

Section 30C – Alternative Fuel Refueling Property

• The IRA will extend and modify the tax credit available for
  alternative refueling property (i.e., electric vehicle (EV)
  charging), increasing the maximum credit available from $30,000 to
  $100,000 and allowing the credit to be calculated per single unit
  rather than per location.




• A credit will also be available to individuals.




• The IRA will extend the credit availability to 2032.




• The IRA will require the property to be placed in a qualified
  census tract and will make a bonus credit available if wage and
  apprenticeship requirements are met.




• If the property is depreciable property, the base credit will
  be 6 percent if the prevailing wage and apprenticeship requirements
  are met.

Section 45(a) – Production Tax Credit for Electricity
Produced from Certain Renewable Resources

• The IRA will extend the renewable energy production tax credit
  (PTC) until the end of 2024, after which the PTC will transition to
  technology-neutral.




• This credit applies to the production of energy from solar,
  wind, geothermal, biomass and hydropower and other eligible
  projects.




• The phasedown currently in place for wind energy is removed as
  of Jan. 1, 2022, permitting onshore and offshore wind projects to
  take the full value of the PTC for 2022, 2023 and 2024.




• The base credit will be 0.3 cents per kilowatt-hour (kWh), with
  a bonus credit of 1.5 cents per kWh (credit multiplied by five) if
  prevailing wage and apprenticeship requirements are met (with an
  exception to these requirements for small projects).




• Taxpayers will be eligible for a bonus 10 percent PTC if
  certain domestic content requirements are met (adjusted percentage
  of generally 40 percent for most projects and 20 percent for
  offshore wind) or if the project is located in an energy community.
  If eligible for both, taxpayers can benefit from both of these
  percentage increases.

Section 45Q – Carbon Oxide Sequestration

• The IRA will extend the carbon sequestration credit for
  facilities that begin construction before 2033 and provides
  additional modifications, including an enhanced credit for direct
  air capture (DAC) and lowering the carbon capture threshold
  requirements at facilities.




• Like PTC and International Trade Commission (ITC), there will
  be a bonus credit when prevailing wage and apprenticeship
  requirements are met.




• Generally, the prevailing wage and apprenticeship requirements
  will be met if:
  
  




• The IRA will lower the annual thresholds of carbon a facility
  must capture to qualify:
  

  • 18,750 tons of carbon oxide for power plants

  
  

  • 12,500 tons of carbon oxide for industrial facilities

  
  

  • 1,000 tons of carbon oxide for direct air capture (DAC)
    facilities




• This credit will be available for direct pay for the first five
  years under broad conditions, and the credits are
  transferable.




• The credit amounts per metric ton of carbon captured will be as
  follows:

Section 45U – Zero-Emission Nuclear Power Production
Credit

• The IRA will create a PTC for the production of electricity
  from a nuclear facility beginning in 2024. The credit expires after
  2032.




• The base credit will be 0.3 cents per kWh, with a bonus credit
  of 1.5 cents per kWh (base credit multiplied by five) if the
  project meets prevailing and apprenticeship requirements.




• The credit is subject to reduction based on gross receipts of
  any electricity sold.

Section 45V – Credit for Production of Clean
Hydrogen

• The IRA will create a PTC and an ITC for clean hydrogen;
  taxpayers will have the option to elect.




• Clean hydrogen can be produced from different sources,
  including renewable electricity (green hydrogen) and natural gas
  reforming (blue hydrogen).




• To qualify, hydrogen must be produced through a process
  resulting in lifetime GHG emissions of no more than 4 kilograms
  (kg) of carbon dioxide per kg of hydrogen.




• The base credit amount will be 60 cents per kilogram of
  qualified clean hydrogen, multiplied by an emissions factor
  depending on the GHG emissions factor provided by the fuel.




• A bonus credit multiplier is offered if prevailing wage and
  apprenticeship requirements are met, wherein the applicable credit
  may be multiplied by five.




• Taxpayers will be able to elect to receive an ITC in lieu of
  the PTC for a base credit of up to 6 percent, or 30 percent if
  prevailing wage and apprenticeship requirements are met.




• No clean hydrogen credit will be allowed for a facility that is
  already qualifying for the carbon sequestration credit.

Section 45W – Credit for Purchase of Commercial Clean
Vehicles

• The IRA will create a new credit for qualified commercial clean
  vehicles.




• The credit will be equal to 15 percent of its cost (30 percent
  if the vehicle is not powered by gasoline or diesel) or the
  incremental (excess) cost for such vehicle as compared to one that
  relies solely on gasoline or diesel.




• The maximum credit will be $7,500 for vehicles with a gross
  weight rating of 14,000 pounds and $40,000 for all others.




• The credit will apply to any vehicles placed in service after
  Dec. 31, 2022, through 2032.

Section 45X – Advanced Manufacturing Production
Credit

• The IRA will create a new production credit through 2032 for
  production of components related to clean energy such as solar
  photovoltaic (PV) cells, wind energy components and battery
  cells.




• The credits will generally be subject to phase out beginning in
  2029.




• The credit amount will vary depending on the applicable
  eligible component.

Section 45Y and 48E – Clean Energy Production Credit and
Clean Energy Investment Tax Credit 

• Beginning in 2025, the traditional ITC and PTC will generally
  no longer apply. They will be replaced by new technology-neutral
  credits.




• Eligibility for these credits generally requires that the
  facility’s GHG emissions are no greater than zero.




• The 45Y base credit value is 0.3 cents per kWh with a bonus
  credit (base credit multiplied by five) if prevailing wage and
  apprenticeship requirements are met.




• The 48E base credit value is 6 percent with a bonus credit
  (credit multiplied by five) if prevailing wage and apprenticeship
  requirements are met.




• These credits phase out in 2032, or when the Secretary of the
  Treasury determines that the annual GHG emissions are equal to or
  less than 25 percent of the emissions produced in 2022, whichever
  is earlier.




• There will be a potential 10 percent onus credit for energy
  communities and when domestic content requirements are met.




• The applicable percentages to meet the domestic content
  requirements increase over time:




• • Generally, the adjusted percentage is 40 percent until 2025, 45
    percent in 2025, 50 percent in 2026, and 55 percent after
    2026.

  
  

  • The adjusted percentage for offshore wind facilities is 20
    percent until 2025, 27.5 percent in 2025, 35 percent in 2026, 25
    percent in 2027, and 55 percent after 2027.

Section 45Z – Clean Fuel Production Credit

• Beginning on Dec. 31, 2024, existing fuel credits will
  transition to the Clean Fuel Production Credit.




• The credit will expire at the end of 2027.




• In order to receive the full credit the fuel must have a
  life-cycle emission level of less than 50 kilograms of carbon
  dioxide per Metric Million British Thermal Unit (mmBTU).




• The base credit for transportation fuel will be 20 cents per
  gallon, while the SAF base credit will be 35 cents per gallon.




• The base credit is adjusted downward based on the emission
  factor of the fuel.




• The bonus credit is available (base credit multiplied by five)
  if production meets prevailing wage and apprenticeship
  requirements.

Section 48 – Energy Credit (Investment Tax Credit)

• The IRA will extend the investment tax credit (ITC) for solar
  energy property and most other ITC-eligible property until the end
  of 2024. (Geothermal credit will be extended until 2035.)




• Like the PTC, the ITC will transition to technology-neutral in
  2025.




• The IRA will expand what is eligible for the ITC, including
  energy storage technology.




• The base credit will be 6 percent, with a bonus credit of 30
  percent (base credit multiplied by five) if prevailing wage and
  apprenticeship requirements are met.




• Similar to the PTC, taxpayers will be eligible for an
  additional 10 percent ITC if certain domestic content requirements
  are met or if the project is located in an energy community.




• In addition, there will be a potential 10 percent bonus credit
  for solar and wind facilities that are located in low-income
  communities.




• Alternatively, there will be a potential 20 percent bonus
  credit for solar and wind facilities that are part of a qualified
  low-income residential building project or a low-income economic
  benefit project.

Section 48C – Advanced Energy Production Credit

• The IRA will revise and extend the advanced energy project
  credit.




• This credit will be available for a wide range of renewable
  energy equipment and will be focused on the manufacturing
  facilities related to the production of equipment.




• The advanced energy project credit will be an allocated tax
  credit (i.e., the IRA will set a maximum that can be allocated on a
  competitive basis).




• Specifically, the IRA will allocate $10 billion, of which at
  least $4 billion must be allocated to energy communities.




• The base credit will be 6 percent, with a bonus credit
  available (base credit multiplied by five) if prevailing wage and
  apprenticeship requirements are met.

The tax credits described above may be subject to reduction if
such projects are financed with tax exempt bonds.

In addition to tax credits mentioned above, tax incentives are
also found in the form of tax deductions. Like tax credits, tax
deductions are generally not beneficial to those entities that are
not subject to federal income tax. However, the tax deduction under
Section 179D has been and continues to be under the IRA, available
to property owned by state, local governments and political
divisions thereof. Specifically, government entities can benefit
from Section 179D by allocating the deduction to the person
primarily responsible for designing the property (e.g., architect,
engineer, contractor, environmental consultant or energy-services
provider).

By way of background, Section 179D provides a tax deduction for
making efficiency improvements to commercial buildings.
Energy-efficient building property that qualifies for the deduction
includes improvements to the building envelope, certain heating,
ventilation and air conditioning systems and lighting systems. It
applies to new construction and the retrofitting of existing
buildings. Government entities will want to reconsider the value of
the Section 179D, given that the IRA enhances the value of the
deduction and lowers the threshold such that deductions will be
available for buildings that improve energy efficiency by 25
percent (down from 50 percent).

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.