Nearly two years ago, President Joe Biden signed into law the Inflation Reduction Act (IRA).1 This law created the largest investment in clean energy in U.S. history2 and will lower household energy costs, mitigate the harms of climate change, and make American manufacturing competitive in the global clean energy economy. But these investments show up as costs in the federal budget.
The law offsets these costs through a few different mechanisms: It provides funding for the IRS that is primarily dedicated to catching wealthy tax cheats, establishes a corporate alternative minimum tax, and taxes corporate stock buybacks. It also cuts into Big Pharma’s profits by lowering costs for individuals purchasing prescription drugs while reducing the federal deficit.
Since the enactment of the IRA, experts have gained a greater understanding of its budgetary consequences through new research and updated cost estimates. As of June 2024, the best information available suggests that the IRA will likely still reduce the federal deficit over the decade by about $175 billion (see Figure 1 below) and will certainly reduce the deficit even more over the long run.3 Importantly, the law is deficit reducing despite its surge of investment and greater-than-expected uptake of those investment incentives.
The clean energy provisions are a success
Robust uptake of the IRA’s clean energy credits is unmistakably beneficial both for the planet and for Americans’ fuel and utility bills; the dramatic expansion of the nation’s clean energy transition helps make possible the U.S. goal to cut climate pollution to half of peak levels by 2030.4 Economists predict that it will cut costs for consumers, including up to $220 in annual savings per household for electricity bills, while helping spur $178 billion in clean energy and transportation investment in the first three quarters of 2023.5
The most recent estimates from Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT), which serves as the tax counterpart to the CBO, put the cost of the IRA’s climate provisions at about $730 billion. This excludes the costs related to an Environmental Protection Agency (EPA) emissions rule because that is a separate policy that the Biden administration issued in April 2023.6 While this brief looks at the deficit impact of the IRA as scored, even if one adds the costs of the vehicle emissions standards rule, the IRA still likely pays for itself over the decade.
The cost of these credits has generated intense interest from the private sector, with their estimates relying on varying concepts, methodologies, and assumptions.7 As actual tax and spending data become available from the IRS and other agencies over the coming years, experts will gain a better understanding of how the updated government estimates measure up to the private sector ones.
The IRA helps reduce costs for American consumers at the gas pump
An example of how the IRA benefits consumers is through savings on gasoline. Revisions to CBO gas tax revenue estimates suggest substantial annual savings by 2032. The combination of the IRA, the Biden administration’s vehicle emissions rule, and electric vehicle market developments has caused the CBO to revise downward expected federal gas tax revenue in 2032 by $4 billion between its (pre-IRA) May 2022 budget outlook and its most recent June 2024 outlook.8 The less that gasoline is consumed, the less revenue the federal gas tax will raise. The CBO projects that the average household will pay $20 per year less in gas taxes, which suggests they will consume about 110 fewer gallons of gas per family per year in 2032 than expected before the IRA. This suggests more than $350 in annual savings on gas in 2032, assuming the price of gas is the same as in 2023, which is roughly consistent with the CBO’s projections of oil prices. Note that unlike the numbers in the rest of this brief, these numbers do include the effects of the EPA emissions rule since the CBO does not disentangle its effects on gas tax revenue from the IRA’s credits.
Assessing legislation based on updated information
The CBO and the JCT make projections based on the best information known at the time, which in turn enables policymakers to use the best information available when deciding whether to support a piece of legislation. The newer a program, the more uncertainty there is in projections. This is the nature of budget scoring.
As new information becomes available, it is fair to reassess the impact of legislation. The analysis in this brief focuses on the updated cost of clean energy provisions in the IRA as well as the most recent information available about the law’s additional funding for the IRS. Since enactment of the IRA, important new empirical research has assessed previous IRS enforcement efforts and allowed for greater precision in estimating the budgetary effects of providing additional funding.9
In February 2024, using the findings in this new analysis on the effectiveness of IRS enforcement, the U.S. Treasury Department updated its estimates of the increased revenue collections from additional IRS funding in the IRA.10
The IRA likely still reduces the deficit over the decade
Despite the clean energy provisions costing more than expected, the savings are still likely to exceed the costs over the decade. To offset the costs of the clean energy and health care investments, the bill enacted ways to reduce health care costs and raise additional tax revenue.
Center for American Progress analysis estimates that the IRA will begin to produce budgetary savings starting in 2028.
The IRA contained multiple provisions to lower Medicare prescription drug prices. Notably, it authorized the secretary of the Department of Health and Human Services to directly negotiate with drug companies on the prices Medicare pays for prescription drugs through both Parts B and D.11 Negotiation produces savings both for Medicare beneficiaries and for the federal government. The IRA is also generating savings by requiring that drug manufacturers pay a rebate to Medicare if they hike prices above inflation.12 Finally, the law produced health savings by further delaying until 2032 a Trump administration rule on Part D rebates that would have eliminated rebates negotiated between Medicare Part D pharmacy benefit managers or health plan sponsors and pharmaceutical companies.13
The IRA also raised revenue through a few mechanisms. Reversing more than a decade of disinvestment, the IRA provided $80 billion to the IRS, primarily dedicated to increased enforcement of tax law. The bulk of this funding is dedicated to hiring more people for stepped-up enforcement of existing tax law, to ensure people pay the taxes they already legally owe. For example, it is estimated that in this year alone, the top 1 percent of taxpayers will not pay roughly $215 billion in taxes they legally owe under existing tax law.14 The act also provided billions of dollars to help modernize the computers and systems used by the IRS in order to boost enforcement and improve customer service. This funding is extremely effective and pays for itself multiple times over.15
The IRA also enacted a new corporate minimum income tax. This tax works toward addressing the problem of large corporations reporting enormous profits to shareholders while paying little to no corporate tax.16 The tax requires about 80 large corporations with more than $1 billion in annual revenue to pay at least a 15 percent tax on those profits, with some adjustments.17 The JCT estimated that this would raise more than $200 billion over 10 years.18
In addition, the IRA created a new excise tax on stock buybacks, which is when corporations purchase their own stock as a way to distribute cash to shareholders. Buybacks have surged over the past few decades, especially after enactment of the Trump tax cuts in 2018, when they hit an annual record of $1 trillion.19 Buybacks enjoy a tax advantage over dividends, which are the other method corporations use to distribute cash to shareholders.20 The IRA began to address that disparity in tax treatment with a 1 percent tax on share buybacks, which the JCT estimated would raise about $75 billion over 10 years.21
In total, the IRA likely will reduce the deficit by $176 billion over the 2022 through 2031 window, the budget window when the bill was first enacted, and $535 billion from 2025 through 2034, the current budget window.
Center for American Progress analysis estimates that the IRA will begin to produce budgetary savings starting in 2028.22
The IRA reduces the deficit in the long run
Roughly 95 percent of the costs of the IRA are temporary. The enhanced health insurance marketplace premium subsidies were extended only through 2025. Similarly, nearly all the clean energy tax incentives end in 2034 or earlier. These energy incentives with explicit end dates account for about 70 percent of all the energy incentives’ costs between 2031 and 2033, suggesting that the total cost of the energy provisions will fall in the second decade.23
The two provisions with significant budget implications beyond 2034 are the clean energy production credits and the investment credits, which account for about 30 percent of the energy incentives’ cost at the end of the budget window.24 They begin phasing out in 2032 or once power sector emissions drop 75 percent below current levels, whichever comes later. Importantly, the uptake of these clean electricity credits is a primary driver of meeting the emissions level that will trigger the credits to phase out, which means the success of these incentives helps to limit their long-term budgetary cost.25
In contrast, a significant portion of the savings continue forever. Both the drug price negotiation power and the drug inflation rebates are permanent policies, with savings both to the federal government and to Medicare beneficiaries growing over time. The corporate minimum and stock buyback excise taxes are also permanent.
And while the enhanced funding for catching wealthy, would-be tax cheats is temporary, the modernization of the computers and systems used by the IRS is not. These better systems will continue to be in place and continue to provide increased tax revenue in the years to come.
With the costs largely temporary and many of the savings permanent, the IRA will undoubtedly pay for itself over the long run, even if the clean energy production and investment credits continue past 2032.
Conclusion
The IRA provided the most significant and important clean energy investment in U.S. history, is lowering health insurance and utility bills, and is helping the IRS catch wealthy tax cheats. And despite U.S. clean energy investments costing more than expected this decade, the IRA did so all while reducing federal deficits in the medium and long term. We should view these large clean energy costs for what they really are: investments in the future.
The authors would like to thank Trevor Higgins, Shannon Baker-Branstetter, Jean Ross, Andrea Ducas, Nicole Rapfogel, Lily Roberts, Madeline Shepherd, Laura Rodriguez, and Emily Gee for helpful suggestions, and Jessica Vela both for helpful suggestions and research assistance.
Methodology
To estimate the updated cost of the clean energy tax credits, the authors used the original CBO and JCT scores of the IRA;26 the score of the Limit, Save, Grow Act;27 and information from the CBO’s February 2024 and June 2024 baselines.28
The authors used Treasury Department estimates of savings generated by the IRA’s additional IRS investments.29 The Treasury’s analysis used evidence from a similar investment in California to estimate that the business modernization would lead to a 1 percent increase in total taxes collected.30 However, the Treasury analysis did not have that value grow over time with the size of the overall tax base. The authors chose to assume that value did grow with the size of the overall tax base. If the authors had instead used the Treasury’s estimate of the impact of business modernization, this brief would still have concluded that the IRA reduces the deficit, though the numbers would have been slightly different.