Tribal Provisions in the Inflation Reduction Act Address Energy, Climate Change
- The Inflation Reduction Act (IRA) passed in August 2022 provides Native American tribes more than $720 million in direct spending for a range of efforts addressing energy and climate change, as well as agriculture, Indian affairs and other areas.
- The law also offers tribes access to tax incentives not previously beneficial given the tax-exempt nature of Native American tribes.
- Such incentives include tax deductions for increasing energy efficiency in buildings and tax credits for the production of renewable energy.
In support of transitioning to clean energy and combating climate change, Congress enacted the Inflation Reduction Act (IRA) (Pub. L. 117-169) to extend, modify and enhance many existing tax incentives, create new tax incentives, and provide funding to Tribal governments to meet their climate goals. Below, we discuss the opportunities included in the IRA that tribes should seek.
The IRA provides more than $720 million in direct funding for Native American tribes. This funding is spread over six titles – Agriculture, Nutrition and Forestry; Commerce, Science and Transportation; Energy and Natural Resources; Environment and Public Works; Homeland Security and Governmental Affairs; and Indian Affairs.
- Section 23001 – National Forest System Restoration and Fuels Reduction Projects. $2.15 billion for hazardous fuels reduction, vegetation management, more efficient and effective environmental reviews, and development and implementation of activities and tactics for the protection of old-growth forests on National Forest Service Lands. This section extends 638 contracting opportunities for tribes.
- Section 23002 – Competitive Grants for Non-Federal Forest Landowners. $150 million for underserved foresters to invest in climate mitigation or forest resilience practices; $150 million for underserved foresters' participation in emerging private markets for climate mitigation and forest resilience; $100 million for small-forest landowners (fewer than 2,500 acres) to participate in emerging private markets for climate mitigation and forest resilience; $50 million to pay private forestland owners to implement forest practices based on the best available science to provide measurable increases in carbon sequestration and storage beyond customary practices on comparable land; and $100 million for grants under the wood innovation grant program under Section 8643 of the 2018 Farm Bill, including for the construction of facilities and hauling removed material to reduce hazardous fuels to locations where the material can be utilized. Grants are capped at $5 million and require a 50 percent cost share. Tribes are eligible entities for these opportunities.
- Section 23003 – State and Private Forestry Conservation Programs. $1.5 billion in grants through the Urban and Community Forestry Assistance Program (16 U.S.C. Section 2105(c)) to tribes, and other eligible entities, for tree planting.
- Section 40001 – Investing in Coastal Communities in Climate Resilience. $2.6 billion for direct expenditure, contracts, grants, cooperative agreements and technical assistance to tribes, and other eligible entities, for conservation, restoration and protection of coastal and marine habitats and resources, including fisheries, to prepare for climate-related events and conditions, as well as for projects that support natural resources to sustain coastal and marine resource-dependent communities.
- Section 50122 – High-Efficiency Electric Home Rebate Program. $225 million in grants to tribes to create electrification rebate programs for homeowners and multifamily building owners. Rebate amounts may total up to $14,000 for new construction purchases, replacement of nonelectric appliances or first-time purchase of the appliance. Covers up to 100 percent of project cost for households below 80 percent of the area median income and 50 percent of the project cost for households between 80 percent to 150 percent of the area median income. Covers up to 100 percent of project cost for multifamily units where 50 percent of households are below 50 percent of the area median income and 50 percent of the project cost for multifamily units where 50 percent of households are between 80 percent to 150 percent of the area median income.
- up to $1,750 for a heat pump water heater
- up to $8,000 for a heat pump for space heating or cooling
- up to $840 for an electric stove, cooktop, range or oven, or for an electric heat pump clothes dryer
- up to $4,000 for an electric load service center upgrade
- up to $1,600 for insulation, air sealing and ventilation
- up to $2,500 for electric wiring
- up to $500, commensurate with the scale of upgrades installed and project labor practices
- Section 50145 – Tribal Energy Loan Guarantee Program. $75 million for the U.S. Department of Energy's Tribal Energy Loan Guarantee Program and $20 billion for loan guarantees.
- Section 50152 – Grants to Facilitate the Sitting of Interstate Electricity Transmission Lines. $760 million for grants to tribes, and other eligible entities, to study and analyze the impacts of covered transmission projects, examine up to three alternate transmission siting corridors, participate in regulatory proceedings, and for economic development activities for communities that may be affected by the construction and operation of a covered transmission project.
- Section 50233 – Drought Mitigation in Reclamation States. $4 billion for grants, contracts, or financial assistance agreements to tribes and public entities for drought mitigation such as diversion or consumptive water use, voluntary conservation projects, and ecosystem and habitat restoration projects. Funding is prioritized for the Colorado River Basin and other basins experiencing comparable long-term drought.
- Section 60101 – Clean Heavy-Duty Vehicles. $600 million in grants and rebates for tribes, and other eligible entities, for replacing eligible vehicles (Class 6 or 7 heavy-duty) with zero-emission vehicles, purchasing, installing, operating, and maintaining infrastructure to charge, fuel, or maintain zero-emission vehicles; related workforce development and training; and related planning and technical activities; and $400 million for tribes, and other eligible entities, proposing to replace eligible heavy-duty vehicles serving communities located in nonattainment areas.
- Section 60103 – Greenhouse Gas Reduction Fund. $7 billion in grants to tribes, and other eligible entities, to issue grants, loans, and other financial and technical assistance to enable low-income and disadvantaged communities to deploy or benefit from zero-emission technologies. The IRA requires that least 40 percent of benefits flow to low-income and disadvantaged communities to deploy or benefit from zero-emission technologies, including distributed technologies on residential rooftops, and 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. Funding is also available for indirect investment supporting public, quasi-public and nonprofit entities that offer financing for projects, including community and low-income-focused lenders and capital providers.
- Section 60106 – Funding to Address Air Pollution at Schools. $37.5 million in grants to tribes, and other eligible recipients, to monitor and reduce greenhouse gases and other pollutants at schools in low-income and disadvantaged communities and $12.5 million in grants to tribes, and other eligible recipients, to provide technical assistance to schools in low-income and disadvantaged communities.
- Section 60107 – Low Emissions Electricity Program. $17 million for outreach and technical assistance to, and partnerships with, Tribal and other governments for reductions in greenhouse gas emissions that result from domestic electricity generation and use.
- Section 60110 – Funding for Enforcement Technology and Public Information. $3 million in grants to tribes, and other eligible entities, to update systems to ensure communication with the Integrated Compliance Information System of the U.S. Environmental Protection Agency (EPA).
- Section 60112 – Environmental Product Declaration Assistance. $250 million for grants and technical assistance to tribes, and other eligible entities, to manufacture construction materials and products for developing and verifying environmental product declarations and for carrying out other activities that assist in measuring, reporting and steadily reducing the quantity of embodied carbon of construction materials and products.
- Section 60113 – Methane Emissions and Waste Reduction Incentive Program for Petroleum and Natural Gas Systems. $850 million to tribes, and other eligible entities, through grants, rebates, contracts, loans and other EPA activities under section 103 of the Clean Air Act, to conduct methane emissions monitoring, and $700 million to perform said activities.
- Section 60114 – Greenhouse Gas Air Pollution Plans and Implementation Grants. $250 million to tribes, and other eligible entities, to develop a plan to reduce greenhouse gas air pollution, and $4.75 billion to implement these plans.
- Section 60201 – Environmental and Climate Justice Block Grants. $2.8 billion for three-year grants to support and facilitate data collection efforts relating to disproportionate negative environmental harms and climate impacts and cumulative impacts of pollution and temperature rise; establish, expand and maintain efforts to track disproportionate burdens and cumulative impacts (including academic and workforce support for analytics and informatics infrastructure and data collection systems); and support efforts to ensure that any mapping or screening tool is accessible to community-based organizations and community members; and $200 million for technical assistance. A partnership between a Tribe and a community-based nonprofit organization would be an eligible entity for the purpose of this section.
- Section 60505 – Environmental Review Implementation Funds. $100 million to tribes, and other eligible entities, to facilitate the development and review of documents for the environmental review process for proposed projects. The nonfederal cost share can be covered by funds from federal, state or local grant programs.
- Section 60506 – Low-Carbon Transportation Materials Grant. $2 billion to reimburse or provide incentives for projects on a Tribal transportation facility, and other eligible projects, for the use of low-embodied carbon construction materials and products in projects, and for the operations and administration of the Federal Highway Administration. Reimbursement amounts equal to incrementally higher cost of using materials relative to the cost of using traditional materials; incentive amount equal to 2 percent of the cost of using low-embodied carbon construction materials and products.
- Section 70007 – Federal Permitting Improvement Steering Council Environmental Review Improvement Fund. Requires consultation with Tribal governments.
- Section 80001 – Tribal Climate Resilience. $220 million for the Tribal Climate Resilience and Adaptation Program, $10 million for the BIA fish hatchery operations and maintenance programs, and $5 million for administrative costs. This funding has no cost-sharing or matching requirements.
- Section 80002 – Native Hawaiian Climate Resilience. $23.5 million for technical assistance, grants, contracts and other agreements for climate resilience and adaptation activities, and $1.5 million for administrative costs. This funding has no cost-sharing or matching requirements.
- Section 80003 – Tribal Electrification Program. $145.5 million for the electrification of non-electrified tribal homes through zero-emissions energy systems, transitioning electrified tribal homes to zero-emissions energy systems and associated home repairs and retrofitting necessary to install the zero-emissions energy systems, and $4.5 million for administrative costs. This funding has no cost-sharing or matching requirements.
- Section 80004 – Emergency Drought Relief for Tribes. $12.5 million for near-term drought relief actions to mitigate drought impacts for tribes that are impacted by the operation of a Bureau of Reclamation water project, including through direct financial assistance to address drinking water shortages and to mitigate the loss of tribal trust resources.
Generally, entities exempt from federal income taxation, such as Native American tribes, do not benefit from tax incentives contained in the Internal Revenue Code. The IRA has changed this dynamic by unlocking the ability of tribes to access these tax incentives.
Direct Pay of Tax Credits in the IRA
Under new Internal Revenue Code Section 6417, certain "applicable entities" – which include tribes – 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 tribes to ask the Internal Revenue Service (IRS) for a cash refund in the amount of tax credit to which they are entitled – i.e. they can ask the IRS for a direct payment.
While we 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 tribes who pay no federal income tax and do not ordinarily benefit from tax credits.
Under the IRA, credits that can be directly paid to tribes include, but are not limited to:
- Section 30C – Charging Stations for Clean Vehicles. A tax credit for installing charging stations for electric vehicles. Per charger, the credit is worth up to $100,000.
- Section 45W – Purchasing of Clean Vehicles. A tax credit for the purchase electric vehicles or mobile machinery. The credit can be worth up to $40,000.
- Section 45Q – Carbon Oxide Sequestration. A tax credit to finance facilities that capture carbon. The credit is variable but can be up to $180 per metric ton of carbon captured.
- Section 45Y – Clean Energy Production Credit. A tax credit for the production and sale of energy from facilities that produce no greenhouse gas. The tax credit is generally 1.5 cents per kWh.
- Section 45Z – Clean Fuel Production Credit. A tax credit for the production and sale of fuel so long as such fuel has a life-cycle emission of less than 50 kilograms of carbon dioxide per mmBTU.
Designation of Tax Deductions in the IRA
In addition to tax credits, tax incentives are also found in the form of tax deductions. As with tax credits, tax-exempt entities, given their lack of federal income tax liability, generally don't benefit from tax deductions. This includes Native American tribes. However, in the name of energy efficiency, the IRA made changes to Internal Revenue Code Section 179D, making it relevant for tribes.
By way of background, Section 179D provides a tax deduction based on the cost of energy efficiency improvements to 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. While the deduction has existed for many years, the IRA enhances the value of the deduction up to a maximum $5 per square foot of the building. The IRA also lowers the threshold such that deductions will be available if the energy efficiency of buildings is improved by 25 percent (down from the previous 50 percent).
Example: A Tribe expends $100,000 for energy-efficient building property, e.g. a new cooling system for an existing building. The building is 200,000 square feet. Based on the cost expended, a $100,000 tax deduction is available. (Note: The deduction is based and limited on the costs expended – under these facts, the maximum deduction amount, $1 million (200,000 square feet multiplied by $5), is unavailable because it is limited by cost.) Although the Tribe would historically not benefit from the available deduction, as a result of the IRA, the Tribe can allocate the deduction to the architect. At a 35 percent federal income tax rate, the architect's tax bill is reduced by $35,000. By leveraging the ability to allocate the Section 179D deduction to the architect, the Tribe has lowered its costs for making such improvements.
As with the direct pay option discussed above, these changes to Section 179D are effective in 2023.
For more information about provisions in the IRA or Holland & Knight's Native American Law Practice Group, please contact the authors.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.