Options for Reducing Energy-Related Tax Breaks

The federal tax code includes numerous provisions related to energy use and production, provisions which grew dramatically in size and number as a result of the Inflation Reduction Act of 2022 (IRA). The IRA established or expanded a number of tax credits designed to boost investment in and production of energy from renewable sources as well as incentivize environmentally-friendly economic behavior, such as purchasing electric vehicles and investing in green technology upgrades for buildings. These incentives, in addition to various other energy-related tax provisions, are projected to lead to hundreds of billions of dollars in foregone revenue and higher spending in the coming decade.

As part of our Budget Offsets Bank, the below table includes a menu of potential changes to various energy-related tax provisions along with estimates of how much they could reduce budget deficits through 2035.

Most of these estimates are very rough, as few official scores and estimates have been produced related to those provisions. Importantly, options are based on the Fiscal Year (FY) 2026-2035 budget window and would be somewhat lower over the FY 2025-2034 budget window.

The table below is a menu of options and does not represent recommendations from the Committee for a Responsible Federal Budget, its board, or its staff.

* Estimate is very rough 
Sources: Congressional Budget Office, Joint Committee on Taxation, Committee for a Responsible Federal Budget.

The IRA included several tax credits and incentives meant to promote clean energy generation, electrification, green technology retrofits for homes and buildings, greater use of clean fuels, green manufacturing, and wider adoption of electric vehicles, among other purposes. At the time of its enactment the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) estimated that the IRA’s energy-related tax provisions would increase deficits by roughly $270 billion over the ten-year period from FY 2022 through 2031. Since that time, however, the estimated deficit impact of the IRA’s energy-related tax provisions has more-than-doubled, due to a combination of higher inflation, greater demand for credits, looser-than-expected regulations, and the implementation of the Biden Administration’s “Tailpipe Rule,” limiting vehicle emissions.

We estimate that repealing the IRA credits after the end of this year would reduce deficits by approximately $650 billion from FY 2026 through 2035. The savings are somewhat smaller than the cost of the credits over that period, as we assume companies and taxpayers would continue to benefit from credits taken between 2022 and 2025. Policymakers could also phase out credits sooner than scheduled. For example, we estimate that ending all credits by 2032 would save about $100 billion through 2035.

Other cross-cutting reforms could also generate significant savings. Imposing component-level “Foreign Entity of Concern” restrictions on a number of IRA credits – effectively preventing projects involving a large percentage of Chinese-derived components from receiving them – could save roughly $100 billion over ten years. Disallowing “direct pay” and “enhanced transferability” of IRA credits could save $50 billion.

Policymakers could also address credits individually. Repealing IRA credits related to electric vehicles (EVs) – which pay $3,750 to $7,500 per vehicle (or more for large commercial vehicles) – would save $240 billion. Reversing the Biden Administration’s “Tailpipe Rule,” which set tough standards on vehicle emissions that will likely drive up purchases of EVs, would save an estimated $150 billion over ten years – mostly from reducing the cost of the EV credit. Assuming repeal of the tailpipe rule, ending the EV credits early – after 2030 instead of 2032 – would save an additional $40 billion. Policymakers could, alternatively, save approximately $50 billion over ten years by eliminating the “leasing loophole” in the Section 45W Commercial Clean Vehicle Tax Credit, which currently allows individuals leasing a personal vehicle to claim the credit meant for purchases of commercial vehicles.

We estimate that reversing all IRA expansions to energy and electricity tax credits – which generally pay 30 to 50 percent of costs – would save $240 billion over ten years, including $130 billion from just repealing the “technology neutral” credits which began this year. Reducing the value of these credits for well-established technologies that already represent a sizable and growing share of the energy generation market, such as onshore wind and solar, could save $100 billion over ten years, depending on design.

The base Business Energy Investment Tax Credit (ITC) is 6 percent and the base Renewable Energy Production Tax Credit (PTC) is $0.005 per kilowatt-hour, but both can be increased significantly – to 30 percent or $0.0275, respectively – if projects pay prevailing wages and have a certain amount of labor hours performed by apprentices. The ITC and PTC can be further boosted by an additional 10 percent or $0.003 per kilowatt-hour for meeting domestic content requirements and/or being located in “energy communities” which have significant historical economic ties to the fossil fuel industry. Removing the prevailing wages and apprenticeship bonus could save roughly $150 billion, while repealing bonuses for projects meeting domestic content requirements or located in “energy communities” could save $25 billion each.

Repealing all the IRA credits meant to incentivize investment in green technologies in new and existing commercial and residential buildings could save $40 billion over ten years – with half the savings from repealing the Section 25D Residential Energy Efficient Property Credit, which allows individuals to deduct 30 percent of expenses related to installing clean energy generation or storage technologies, such as solar panels, fuel cells, wind turbines, or battery storage. Repealing the Section 45X Advanced Manufacturing Production Tax Credit, which incentivizes manufacturing of materials used in clean energy generation, would save $75 billion over ten years, while repealing the specific production credits for clean fuels and clean hydrogen could save $40 billion and reversing the IRA’s expansion of the credit for carbon sequestration would save $30 billion. Modifications to these credits could generate smaller amounts of savings.

Outside of the Inflation Reduction Act credits and incentives, there are several tax incentives that apply to fossil fuel exploration and production that lawmakers could look to for savings. Repealing “percentage depletion” for oil and gas wells – which allows companies to deduct a portion of income from oil and gas wells to cover development costs and account for the reduction in value of said wells resulting from mineral extraction – would save $10 billion over ten years, while repealing expensing for “intangible” costs incurred during the initial stages of well development and drilling would save $5 billion. Lawmakers could also save another $5 billion by repealing various, smaller fossil fuel tax breaks.

Lawmakers could also realize savings by making changes to other parts of the tax code that tend to benefit fossil fuel producers. For instance, large oil companies are the most common users of “Last In, First Out” accounting methods, which minimize their tax liability by recording profits as the difference between revenue from selling a barrel of oil and the price of the most recent barrel purchased. Repealing this and related accounting methods such as “Lower of Cost or Market” in favor of “First In, First Out” (FIFO) would save $105 billion over ten years. Lawmakers could also modify rules governing how income from foreign oil and gas extraction, sales, and related activities is taxed, potentially saving $40 billion.

The various energy-related tax breaks and incentives in the tax code represent hundreds of billions in foregone revenue over the next decade. They are also some of the most complex parts of the tax code. By repealing or making well-designed modifications to these provisions, lawmakers can achieve significant deficit reduction while also simplifying the tax code and reducing compliance costs for businesses. As lawmakers work to address our rising debt and finance new initiatives, all parts of the budget and tax code should be on the table for consideration. Our Budget Offsets Bank will continue to feature deficit reduction options from both the spending and revenue side.