The Roots of the IRA
The story of how the Inflation Reduction Act (IRA) was passed may seem incidental to the content of the bill, but Senate rules, and the bill’s circuitous path through them, very much impacted what types of incentives for climate technology and renewable energy could be included and which couldn’t.
The roots of the IRA lie in the Build Back Better Act (BBB), a $3.5 trillion bill that Democrats tried to pass through Congress. It was meant as a wide-ranging budget bill, with funding for everything from infrastructure to childcare to climate and renewables. It was a long wish list that was no doubt designed to have some pieces that would be compromised away. But Biden and the Democrats probably did not anticipate having to compromise on so much of it, given that they had a majority in both houses.
The Carnage of Compromise
Because of the Democrats’ control of Congress, negotiations were not between Democrats and Republicans but among Democrats themselves. With a majority in the Senate that relies upon the tie-breaking vote of the Vice-President, the moderate Democrats in the Senate held all of the power in the negotiations. And they wielded that power. The main holdouts were Krysten Sinema of Arizona and, particularly, Joe Manchin of West Virginia.
BBB was whittled down to its bones and then seemed to die entirely. After months of negotiations, Manchin, the final opposition, said that he couldn’t move forward. Eulogies were written and autopsies performed, but apparently negotiations continued behind the scenes on the provisions that could be agreed upon. Seemingly out of nowhere to everyone except the closest of observers, Manchin and the Senate Majority Leader Senator Chuck Schumer announced the reincarnation of parts of BBB in the form of the Inflation Reduction Act. The bill would now raise $737 billion and spend $437 billion, with the rest going to deficit reduction. Within days it was passed by both houses of Congress.
The negotiation process had reduced the $3.5 trillion Build Back Better bill to the $437 billion Inflation Reduction Act. It’s a tiny fraction that was no doubt very disappointing to the original architects of the plan. But it retains some very important provisions laser-focused to produce the most impact possible.
Budget Reconciliation: the way you accomplish your goals when you have to deal with the filibuster
The bill was passed through a somewhat unusual process known as budget reconciliation. Since the Senate’s filibuster rules require legislation pass with a 60-vote majority to overcome a potential filibuster, the Democrats’ razor-thin majority did not allow for much dramatic action. The seemingly endless debate over whether or not to reform the filibuster has left it in place, except for in a few specific policy areas, one of which is the budget. Seemingly to acknowledge that budget negotiations would be constant brinkmanship between parties if it were subject to the filibuster, it was decided that the budget was just too important to be held up in that way. As a result, only a simple majority is required to pass a budget bill. This allows the party with a majority to include budget items without the approval of anyone in the other party.
But this strategy comes with some serious restraints. More specifically, the budget reconciliation bill can only contain provisions that impact the deficit – not just any money the government spends. What counts as purely a budget issue and what is considered outside of that is somewhat subjective, with the non-partisan Senate parliamentarian passing judgment on whether a particular provision is too far off-topic. The Senate could theoretically ignore the parliamentarian’s advice, but it would be a bad look.
Constraints and Workarounds
So any provision Democrats wanted to include in the IRA would have to directly affect the deficit. In practice, this meant that they couldn’t include any grants or direct investment, they could only use levers like tax credits. This is why the renewable energy and climate technology funding that the industry will receive from the IRA is coming in the form of tax incentives.
This also explains why the direct pay option, a fairly novel idea, was created. The direct pay option allows a recipient of the tax incentives to receive the credit as an up-front payment from the IRS instead of waiting until tax time to get the benefits. As an up-front payment, the direct pay simulates the effect of a grant while technically being a tax incentive and therefore within the purview of a budget bill.
In an ideal world, climate technology and renewable energy companies would be able to receive direct assistance from the government in order to support them as they develop from nascent technologies into commercially viable businesses. But the legislative process in a democracy is rarely ideal. It’s often a sloppy and chaotic ordeal that produces half-measures and incomplete market signals.
The IRA is a perfect example. The constraints of the legislative process directly dictated the content of the bill and the levers with which the government can encourage climate tech and renewable energy.
