A tax provision in the Inflation Reduction Act incentivizes clean energy projects in low-income communities. A similar, existing provision for affordable housing infrastructure may offer lessons for effective implementation of the new program.
On August 10, the Low-Income Communities Bonus Credit Program was added officially to the US tax code as part of provision 48E after a yearlong rulemaking process and period of accepting public comment. This bonus program in the 48E tax incentive in the Inflation Reduction Act is an important component of the whole-of-government approach toward delivering the benefits of a clean energy transition to low-income and historically disadvantaged communities. The initial 30-day application window for the tax credit closed on November 18. In December, the US Department of the Treasury reported receiving “remarkable demand” during this application window, with more than 46,000 applications received for new wind and solar projects. This demand represented more than 8 gigawatts of proposed capacity, though the allocation for the program in 2023 was only 1.8 gigawatts.
The 48E credit provides new tax benefits for private developers of renewable power-generation projects that have less than 5 megawatts of output capacity and are located in low-income communities. Technologies that are eligible for the incentive include utility-scale developments and residential rooftop solar systems. The deadline for the first round of applications ended on November 18.
As Deputy Secretary of the Treasury Wally Adeyemo stated, “Sky-high demand for this new program shows that communities that have long been held back by lack of investment will see significant benefits from these resources.” It is worth exploring how the bonus program for low-income communities in 48E could influence the distribution of benefits that flow from public investment in renewable power. What lessons can we learn from similar efforts, in terms of the potential to deliver economic and environmental benefits? What potential pitfalls should be avoided with this kind of tax policy approach?
Who Can Use the New Tax Credit?
The bonus program for low-income communities is available to developers that apply for the 48E tax credit (also known as the Business Energy Investment Tax Credit) to construct new facilities that generate power (and in some cases, store power) from wind and solar energy and that fall within one of four eligible categories (Table 1).
Table 1. Criteria for Eligibility for the Low-Income Communities Bonus Credit Program
Notes: (1) The federal guidance for the Low-Income Communities Bonus Credit Program references “Indian Land,” which has a special definition under the Energy Policy Act of 1992.
The magnitude of the benefit varies, depending on the type of project and where a project is located. The tax benefits for categories three and four are higher because the benefit for communities is anticipated to be higher, too. These projects are required to share the financial benefits of the renewable energy facility directly with the host community, whereas categories one and two do not contain this requirement and simply require projects to be located within a qualifying low-income community as defined by the US Department of Energy.
For category one, 490 megawatts of the generation capacity are reserved for residential behind-the-meter projects (i.e., renewable energy projects that are tied to a customer’s electricity meter, such as rooftop solar), with the remaining 210 megawatts reserved for front-of-the-meter projects (i.e., projects that are directly interconnected to the grid and not tied to a customer meter, such as utility-scale generation facilities). The capacity reserved for residential projects is larger, which may indicate that the government is hoping to see projects that provide power directly to households at competitive rates.
The bonus program for low-income communities in the 48E credit currently is limited in its impact because the incentive is not guaranteed for all qualifying projects. Because the sum of applications received during the initial application window exceeds the available funding, qualifying applications will be entered into a lottery for funding awards.
What Could This Incentive Program Do for Communities?
This incentive aims to shift a portion of planned new power generation from wind and solar into low-income communities by providing an additional tax bonus of 10 or 20 percent on top of the investment tax credit of 30 percent. Researchers already are making efforts to identify optimal sites for investment through the Low-Income Communities Bonus Credit Program, which could help reduce the costs of planning and project development.
The intended economic benefits for low-income communities of this bonus program in 48E include lower energy bills for residents and profit sharing between developers and members of the community. Projects that incorporate energy storage, and that help facilitate continued power during grid outages, could deliver the additional economic benefits of a more reliable power supply and increased community resiliency. As weather patterns become more extreme, the reliability of power will become an increasingly important component of efforts to provide equitable access to energy. Winter Storm Uri, a snowstorm that struck Texas in 2021, serves as an example. Over 4 million households lost power during the storm; many households were without power for several days during freezing conditions, and census tracts with a high share of minority households were more than four times likelier to have suffered a blackout during the storm than tracts that were predominantly white.
Credit: Thomas Licamele / Shutterstock
Within this context of community needs, two attributes of this bonus program in 48E make the tax incentive a particularly powerful tool for expanding access to affordable renewable energy and the benefits of new clean energy markets: the 48E credit is available until 2032, and the incentives in 48E are focused on developers rather than customers. This incentive mechanism provides relative certainty that the financial benefits of the tax bonus will be available to project developers for the next 10 years, given that the incentive is a tax provision rather than a grant. And the focus in this bonus program on renewables that are funded by developers, along with its emphasis on rooftop solar, enables the incentive to transfer the financial burden of installing renewables from low-income households and affordable housing providers to energy developers.
What Can We Learn from Similar Efforts in Affordable Housing?
This bonus program in the 48E credit is modeled on the Low-Income Housing Tax Credit (LIHTC), the largest subsidy program administered by the federal government for incentivizing the private-sector development of affordable rental housing. The LIHTC program has financed the creation of more than 3 million new housing units since the program was established as part of the Tax Reform Act of 1986.
Tax credits allocated through both the LIHTC program and the bonus program for low-income communities in 48E generate revenue and are transferable: a project developer essentially can trade the tax credit in exchange for direct investment in a project. This structure creates a pathway to generate up-front financing for the development of a project, while generating benefits for a broader group of constituents than would be impacted by a direct supply-side subsidy, such as tax rebates or utility rebates to a household for residential solar installation. By generating a market that creates investment opportunities, rather than solely focusing on incentivizing individual households, these two incentive programs ensure that the economic benefits of renewable energy expand beyond the individual households that can afford to install solar power and energy storage.
While these demand-side policies reflect an investment in people, the LIHTC program and this bonus program in 48E, which are supply-side policies, reflect an investment in place.
The model of the LIHTC program has proven effective at generating bipartisan political support and has been replicated at the state level across party lines. Notably, Texas passed HB 1058 in the state’s 2023 legislative session, which established a state LIHTC program; Texas is the 30th state in the country to pass such a law. The bonus program for low-income communities in 48E similarly could benefit from the model of using investable tax credits. Broad support may help enable the expansion of this incentive at the state and federal levels for the development of clean energy in low-income and historically disadvantaged communities.
The LIHTC program and this bonus program in 48E reflect supply-side approaches to sectoral policy that are intended to complement existing demand-side programs. In the housing sector, demand-side fiscal policies include vouchers that serve as a direct subsidy to renters, or tax benefits for individuals who own homes. In the energy sector, demand-side policies include direct tax credits and rebates for individuals who install solar panels and energy-storage systems.
While these demand-side policies reflect an investment in people, the LIHTC program and this bonus program in 48E, which are supply-side policies, reflect an investment in place. Place-based policies can address the reality of geographic concentrations of poverty and racial segregation in the United States. However, evidence indicates that the LIHTC program may have contributed to concentrations of poverty and, at the very least, has not meaningfully deconcentrated poverty. While the LIHTC program enjoys broad political support, an extreme lack of data on the implementation of the program has impeded researchers from determining whether the LIHTC program has resulted in a larger overall supply of affordable housing.
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Another item to note with the bonus program for low-income communities in 48E is that a wind or solar facility is considered to be located in an eligible low-income community if 50 percent or more of the maximum power-generation capacity of the facility is in a qualifying area. Any evaluation of the efficacy of this bonus program in 48E in bringing renewable energy to underserved communities will need to look not only at the direct financial benefits for low-income community members, but also at the benefits related to a cleaner power supply and the direct financial benefits to households that receive power from a facility that was awarded an incentive but doesn’t fall into one of the four eligible categories.
The risk also exists that projects funded by 48E via categories one and two of the bonus program for low-income communities, which do not require any direct financial benefit for residents within a hosting community, could concentrate solar and wind development in low-income communities without providing any benefit to community members. More research is needed to understand the effects of proximity to utility-scale solar and wind energy installations on property values and opportunities for community development, including the potential suppression of property values and reduced opportunities for wealth accumulation—or even the inflation of property values, which could contribute to gentrification and displacement.
We can learn from the administration of the LIHTC to help achieve the full potential of the Low-Income Communities Bonus Credit Program. Like the LIHTC program, the bonus program in 48E is funded through the Internal Revenue Service but administered by a different agency. The LIHTC program is administered by the US Department of Housing and Urban Development and structured as blocks of funding that are allocated to states, which then award tax credits to eligible properties via a system of competitive scoring. The Department of Housing and Urban Development does not maintain a centralized database of tax credits that have been awarded and the private funding that awarded projects bring in, which makes assessing the economic impacts of this program extremely difficult.
Thomas Licamele / Shutterstock
46,000
The US Department of the Treasury reported receiving more than 46,000 applications for new wind and solar projects under the Low-Income Communities Bonus Credit Program. This demand represented more than 8 gigawatts of proposed capacity, though the allocation for the bonus program in 2023 was only 1.8 gigawatts.
The bonus program for low-income communities in 48E is administered by the US Department of Energy and will be allocated across the four eligible categories. If the Department of Energy and the Biden administration want to evaluate the efficacy of this program, they may want to consider collecting, documenting, and centralizing data on the value of the awarded tax credits; the private investment leveraged through the direct sale of those tax credits (where applicable); and the total private investment in the awarded renewable energy projects. Such data will enable economists to conduct evaluations on how to optimize this policy to help meet objectives related to decarbonization, energy affordability, and environmental justice.
Looking Forward
We won’t know the impact of this bonus program in 48E on the placement of renewable energy developments and the amount of investment in low-income communities until after the application period closes and until the Department of Energy shares information on the body of applications that the agency received and awarded. Direct financial benefits, in the form of profit sharing or reduced energy expenses for households, will be critical to examine as renewable systems that receive support through 48E are built and brought online.
Evaluating the resulting power reliability and avoided outages also will be important in understanding the economic effects of this new tax provision in communities. Additional research could contribute to a deeper understanding of the value to communities of colocated renewable power; for example, investigations of whether new renewable energy resources can reduce air pollutants in communities by displacing fossil fuel–powered generation or reducing the likelihood that new fossil fuel–powered facilities are constructed nearby. Given the history of the LIHTC, the federal government may want to monitor the progress of 48E carefully, to ensure that the incentive delivers the intended benefits to communities and works according to the will of impacted communities.
