Senate Democrats Announce Breakthrough Bill on Energy, Climate, Tax Reform and Prescription Drug Pricing

Energy and Climate

A major focus of the bill is on clean energy and climate change policy. The bill would allocate $369 billion for energy and climate programs over the next decade. Notable energy and climate provisions include:

• A production tax credit (PTC) and a parallel investment tax credit (ITC) for all clean electricity technologies (including additions in capacity) placed in service after December 31, 2024. Facilities in communities that are the sites of retired fossil facilities will be eligible for a 10 percent credit increase.
• A PTC for existing nuclear facilities of up to $15 per megawatt hour.
• A clean hydrogen production tax credit (PTC) of up to $3/kg. This is essentially the same PTC that was included in the Build Back Better (BBB) Act, with a deletion of the lowest tier PTC for projects with greater lifecycle emissions.
• An expansion and extension of the 45Q credit for carbon capture and storage.
• Incentives to on-shore clean energy manufacturing, including production tax credits to accelerate U.S. manufacturing of solar panels, wind turbines, batteries and critical minerals processing. The legislation also includes investment tax credits for clean technology manufacturing systems for electric vehicles, turbines and similar products.
• Incentives for domestic and allied critical mineral production by making the tax credit for plug-in electric vehicles contingent on their containing a certain percentage of domestic and allied critical minerals.
• Inclusion of critical minerals under the Advanced Manufacturing Production Credit, while excluding critical minerals from the production credits’ phase out.
• A requirement to reinstate three recently cancelled offshore oil and gas lease sales in the Gulf of Mexico and Alaska’s Cook Inlet.
• The Methane Emissions Reduction Program, which would place a fee on excess methane emissions up to $1,500 per metric ton by 2026, while offering $850 million in grants to help industry monitor and reduce methane emissions.
• Incentives to decarbonize the transportation sector, including:

-  Tax credits and grants to support the domestic production of biofuels and the infrastructure for sustainable aviation fuel.

-  Tax credits and grants for clean fuels and clean commercial vehicles

-  $4,000 tax credits for lower- and middle-income buyers to use to purchase used electric vehicles, and up to $7,500 tax credits for new vehicles.

• $2 billion for Department of Energy national labs, including $280 million for fusion energy science.
• Tax credits for consumers who install renewable energy items in their homes, including rooftop solar panels, electric HVAC systems and efficient heat pumps.

Taxes and Deficit Reduction

The bill also includes tax provisions to generate revenue to pay for the historic energy and climate investments and to pay down a portion of the U.S. federal budget deficit. Notable tax provisions include:

• Establishing a corporate alternative minimum tax of 15 percent for corporations with a three-year average income exceeding $1 billion (expected to generate $313 billion in new revenue).
• Allocating funding to enhance Internal Revenue Service enforcement and taxpayer services, such as development of a free e-file service (expected to generate $124 billion in new revenue).
• Ending the carried-interest tax break and treating carried-interest as regular income, taxable at a higher rate. Under current law, the “carried interest loophole” allows individuals to pay a lower tax rate on income derived from certain investments (the capital gains rate of 20 percent) so long as they held their investment for at least three years. The proposal would make it more difficult for individuals to take advantage of the carried interest loophole by extending the time that an individual must hold an investment to five years for those individuals making more than $400,000 a year (expected to generate $14 billion in new revenue).

The Senate proposal does not expand the state and local tax (SALT) deduction. Bill sponsors have stated that the tax reform provisions will not increase taxes for those with an annual income of less than $400,000.

Health Care

The legislation will also provide $64 billion to extend Affordable Care Act premium subsidies—currently set to expire at the end of the year—to 2025. It is further designed to lower prescription drug prices by allowing Medicare to directly negotiate prescription drug prices and capping Medicare beneficiaries’ out-of-pocket costs at $2,000. While the negotiation provisions only initially apply to a subset of ten prescription drugs (eventually increasing to twenty), it will focus on those with higher government spend, as well as other considerations. Currently prices are set by manufacturers, and it is estimated that allowing Medicare to negotiate with prescription drug manufacturers will result in $288 billion of savings over a 10-year period. 

Outlook for Passage and Next Steps

The Inflation Reduction Act is set to move through the Senate’s reconciliation process which requires only 50 votes for passage instead of 60, meaning that if all 50 Democratic Senators back the bill, the legislation can pass that chamber with no Republican support and a tie-breaking vote from Vice President Harris. While all 50 Democratic Senators have not yet announced firm support for the bill, Sen. Manchin’s approval signals a positive outlook for Senate passage given that he was a critical holdout on previous attempts to pass a reconciliation package.

Senate sponsors have indicated their intention to vote on the reconciliation package next week before leaving for August recess. If passed by the Senate, the bill will move to the House, where Democrats hold a majority. While some members of the House Democratic caucus may bristle at certain provisions—for example, an absence of increased SALT deductions—House Democrats will face tremendous pressure to pass the bill given the popularity of climate provisions within the Democratic base and the importance of the bill to President Biden’s economic and social agendas.

Enactment of the Inflation Reduction Act would represent a historic investment in clean energy technologies in the United States, with U.S. energy developers, suppliers and other downstream actors poised to benefit. If it is enacted, there will be tense negotiations at the Congressional and Agency level over the administration and rules surrounding new funding, incentives and programs, and stakeholder input will be critical to maximize efficiency and benefits for industry. Members of Pillsbury’s top-rated energy, hydrogen and public policy teams are continuing to monitor developments in the legislative process and work with clients to take advantage of new opportunities.

The authors would like to recognize the contributions of colleagues Craig Saperstein, Brian Finch, Nancy Fischer, Anne Austin, Amanda Halter and Johnna Purcell to this alert.