Tax credit incentives for local governments could ‘turbo charge the clean energy economy,’ but need clarification

Over the last few years, the federal government has launched a number of clean energy initiatives enabling city and county governments to address localized impacts of climate change in their communities. One of the provisions included in the Inflation Reduction Act lets local governments access “direct pay” incentives, reimbursing them via tax credits for qualifying clean energy purchases like community solar, clean vehicle fleets, battery storage and EV charging infrastructure.

“Allowing cities to utilize elective pay credits can catalyze local climate projects and turbo charge the clean energy economy at a scale that was previously unimaginable,” said Kate Wright, executive director of Climate Mayors, an advocacy collective representing 350 mayors across the United States, in a statement.

Made available through the Biden Administration’s Clean Energy Plan, the program will give tax exempt entities—like non-profit organizations, state, local and Tribal governments, and rural electric cooperatives—access to the same credits corporations have long been able to access. This will make projects more affordable, leveling the playing field between the private and public sectors, the statement notes.

“With investments ramping up in renewable energy, electrified transportation and green jobs, now is a fantastic time for cities to take advantage of elective payment credits,” said Satya Rhodes-Conway, mayor of Madison, Wisc., and chair of Climate Mayors. “Here in Madison, we expect to be able to access over $10 million in credits from projects we already have planned. That will help us invest even more in making our community more resilient, sustainable and equitable.”

The tax credit initiative has the potential to hugely impact communities of all sizes throughout the United States. That being said, amid historic staffing challenges, some organizations might not fully understand how to take advantage of the opportunities—or have enough staff on hand to be able to navigate the necessary bureaucracy. A letter signed by 50 American mayors sent by Climate Mayors to the Department of the Treasury and the Internal Revenue Service, which is overseeing the program, expressed a need for educational efforts from the agency to ensure all localities “understand the full extent that they can access the clean energy credits without being penalized,” the statement says. “The reality for many localities is that they are constrained by limited staff capacity and financial resources. The Treasury and administration must work together to ensure localities don’t miss out on these credits.”

Specifically, the letter recommends that federal administrators identify the timeline from registration to elective payment, and clarify eligible entities “as it relates to certain agencies and instrumentalities within political subdivisions, such as housing and transit authorities and/or publicly owned utilities,” the statement says. Other suggestionss include highlighting projects that have a potential for ‘pre-approval,’ better describing what would cause the Treasury to issue a penalty for excessive payment, and a recommendation that the Treasury work across agencies to support local governments so they can maximize incentives and get the most out of their money.

“We hope further clarifications of the rules will allow local leaders to fully leverage their climate investments,” Wright said. 

Notably, tax credits have been used to incentivize investment in clean energy solutions—from solar panels to wind turbines—for a while in the private sector. A report on the impacts of the incentive program published last month by the U.S. Conference of Mayors’ Alliance for a Sustainable Future, notes that allowing cities and counties to do the same will fundamentally change their approach to climate change resilience and mitigration. 

“The federal government continues to expand its support of local governments to invest in climate and resilience projects,” the conerence’s report says. The IRA’s introduction of direct pay tax credits for municipalities creates a new tool in the municipal toolbox to make these types of projects a reality.”