The Department of Treasury and Internal Revenue Service’s temporary regulation governing the Inflation Reduction Act’s tax credit elections present complex pre-filing processes, challenges concerning ongoing compliance and reporting as well as concerns about how smaller state and local governments will be able to afford the costs.
That’s according to a joint letter signed by the Government Finance Officers Association, National Association of Counties and the National League of Cities.
The Inflation Reduction Act allows tax-exempt and governmental entities to receive elective, or direct payment for 12 clean energy tax credits, including tax credits for electric vehicles and charging stations and major investment and production tax credits.
“GFOA, NLC, and NACO are committed to the success of the IRA’s direct pay program,” the letter said. “However, after our members’ review and assessment of the feasibility of the temporary regulations, we are concerned that the hard fought gains of the program will not be utilized by local governments to make substantial renewable and clean energy investments, a sector that could potentially contribute to revolutionary impact. We strongly believe that if Treasury and the IRS do not heed our recommendations in this letter, the program will not yield the results the Administration is seeking.”
The letter notes that while local governments are accustomed to using tax credit elections, the mandatory pre-filing process will be onerous. And as some governments have more resources than others, the filing process, “in some cases, require robust technical assistance from a consultant,” the letter said, or some local governments will be forced to abandon these projects altogether.
The groups offer a few solutions to this problem, including recommendations for the IRS to designate a team of IRS employees to answer basic questions about each credit/application to make sure there is an IRS contact helping local governments through every stage of the execution.
The groups also recommend streamlining the pre-filing registration process, as some projects such as electric vehicle charging stations are far easier to implement than, for example, setting up an anaerobic digestor facility that process organic waste and the registration process should make it easier for easier to complete projects that also may carry a smaller eligible elective credit amount.
The letter also takes aim at compliance and reporting requirements, noting that Treasury and the IRS should make direct pay elections as simply as possible and comparable to what taxable entities already use to claim tax credits.
“Treasury should provide a way for eligible entities to make a single election for multiple properties or projects. Smaller local governments do not have excess capacity in their finance offices to file multiple elections for properties or projects,” the letter said, noting that 93% of cities in the U.S. have fewer than 30,000 residents.
The groups also provide solutions to some of these problems, which includes adding the required IRS submission in a form already used, such as Form 8038-CP. But if Form 990-T is the most feasible avenue for reporting the project, which currently very few tax-exempt entities use, then the IRS should provide manuals or templates that would minimize any unintended intimidation. The letter also recommends allowing some relief for new entrants if they do not file by their due date or extension date.
The added costs for consultants in order to comply with the tax requirements is also an area of concern. “Our members have noted the internal process of weighing the costs of compliance against the benefit of elective pay. If costs outweigh the benefit, then the jurisdiction will have less incentive to participate in the program,” the letter said.
But there are other uncertainties that loom underneath the regulations, as the letter notes that the timing and ultimate amount of credit payment would lead to increased financing costs for all local governments because investors would be inclined to search for higher yields and additional cash reserves to offset the risk of future cash-flow shortfalls.
Others believe the tax incentives could ultimately undermine the tax-exempt market if many high-profile projects create enough momentum so that the municipal market begins thinking about itself as a direct-pay tax credit market.