Focus on Ag: Highlights of the ag provisions in the Inflation Reduction Act
In late August, President Biden signed the “Inflation Reduction Act of 2022” (IRA) into law. The IRA was previously passed by the U.S. Senate by a slim margin and later approved by the U.S. House of Representatives. In both Houses of Congress, the IRA Bill passed along party lines with support from Democratic members of Congress and opposition from Republican members of Congress. The opposition was largely due to the rather large cost of the legislation and questions as to whether the legislation could accomplish all the goals and objectives that were set forth in promoting the Bill.
The IRA legislation is a $740 billion tax, climate and health care reconciliation package, including over $370 billion targeted toward climate-smart projects and renewable energy spending over the next ten years (2022-2031). Based on early analysis, there would be nearly $44 billion in the IRA legislation to fund agricultural conservation, rural development and forestry programs. The IRA legislation calls for “greenhouse-gas” emissions to be reduced to 44% below 2005 levels by 2030, which was enhanced from a 35% reduction under previous federal policy.
The IRA legislation includes several provisions to enhance the production and promote the use of electric vehicles (EV’s), including the use EV tax credits. There were also several agriculture-related rural energy and biofuel provisions in the IRA legislation, including the following:
- Allocates approximately $3 billion for the U.S. Department of Agriculture’s “Rural Energy for America Program” (REAP) to fund programs that improve the technology and efficiency of producing, storing and delivering electrical energy resources in rural areas.
- Provides $9.7 billion specifically targeted toward rural cooperatives for assistance with rural electric systems to purchase renewable energy, to upgrade renewable energy and zero emissions systems, to improve storage systems, and to enhance carbon capture, as well as other initiatives.
- $500 million in new funding to add blender pumps and other biofuels infrastructure.
- Extends the $1.00 per gallon blenders tax credit for biomass-based diesel fuel through 2024 and would then replace that tax credit with a new tax credit that is based on the biofuel’s carbon rating.
- Creates a temporary $1.25 per gallon tax credit for the production of sustainable aviation fuel (SAF) to serve as a bridge until the new clean fuels tax credit is in place in 2025, which will be an incentive for SAF production through 2027.
- The IRA legislation also included $10 million for new grants to support advanced biofuels and $5 million for the Environmental Protection Agency (EPA) to complete data collection on greenhouse gas emissions through the Renewable Fuels Standards program.
Approximately $19.7 billion, or about 45% of the total IRA funding that is allocated toward agriculture and rural development programs, is targeted toward existing conservation programs on working farmland. All of these conservation programs are currently included under the Conservation Title (Title II) of the Farm Bill. The current Farm Bill is set to expire in 2023, so it is not known how this new conservation funding will dovetail into the existing conservation funding when the next Farm Bill is written. It should be noted that the IRA legislation did not provide any additional funding related to the popular Conservation Reserve Program.
Conservation funding and provisions in the IRA legislation
- $8.45 billion over ten years for the Environmental Quality Incentives Program (EQIP).
- EQIP provides farm operators and ranchers incentive payments to enhance conservation efforts.
- $3.25 billion for the Conservation Stewardship Program (CSP).
- CSP provides farm operators 5-year incentive payments to implement new conservation practices.
- $4.95 billion for the Regional Conservation Partnership Program (RCCP).
- RCCP involves NRCS partnering with landowners and private entities on larger conservation projects.
- $1.4 billion for the Agricultural Conservation Easement Program (ACEP).
- ACEP involves working with NRCS on specific long-term conservation efforts on working farmland.
The IRA legislation extends through the 2031 federal fiscal year; however, most of the expenditures for the conservation-related initiatives are scheduled to occur from 2023 to 2026. So, any additional funding for these conservation programs beyond 2026 may need to come through the Farm Bill or other legislation.
Other provisions in the IRA Bill that could impact residents in Rural America
- $5 billion for wildfire prevention and climate resiliency projects on public and private lands.
- $5.3 billion in farm debt relief to “distressed” borrowers that hold direct or guaranteed Farm Service Agency (FSA) loans, including $2.2 billion targeted toward farmers that had experienced discrimination when applying for or during the administration of USDA farm loan programs. These payments would be capped at $500,000 per producer. Some of these program provisions were previously passed under the American Rescue Plan in 2021, which has been held up in court proceedings.
- IRA allows Medicare to negotiate the costs for some prescription drugs with the manufacturers and would cap the out-of-pocket drug costs for some seniors enrolled in Medicare
There is considerable disagreement on whether the IRA legislation will actually meet the goal of reducing the Federal deficit and controlling inflation; however, analysts do project that the IRA will generate approximately $700 billion in new revenue over the next ten years (2022-2031). The revenue enhancement will come via a 15% minimum corporate tax for large corporations, a 1% excise tax on the value of stock buy backs and increased Internal Revenue Service (IRS) enforcement efforts. The 15% minimum tax would be on the income that large corporations (over $1 billion in profits) report to their shareholders. It is estimated that this change will only affect about 150 corporations in the U.S. The IRS will receive $80 million through the IRA legislation to boost tax audit capacity by adding up to 87,000 IRS employees, which is projected to generate over $200 billion in added income taxes that are legally owed.
The Inflation Reduction Act (IRA) has been quite controversial and politically divisive, due to some of the provisions contained in the legislation and the rather large price tag of the legislation. We are in the very early stages of the implementation process for the IRA legislation; however, it does appear that there will be funding for climate related energy and conservation projects and programs, as well as health care initiatives, that could impact farm operators and rural residents. It may take some time for USDA and the other Federal agencies to roll out the full implementation of these programs, some of which will be an expansion to existing programs and others may be new programs. On the surface, it does not appear that there will be a large tax impact on most rural residents; however, it is not known what effect that the increased IRS audits and potential future taxes may have on farmers and other small businesses in rural areas.