Biden’s Inflation Reduction Act could end up costing taxpayers nearly $5 trillion, study says

When former President Joe Biden’s signature Inflation Reduction Act (IRA) passed in 2022, it did so along party lines with not a single Republican voting for it. At the time, a Senate one-pager summarized the law as costing taxpayers $369 billion, based on Congressional Budget Review (CBO) estimates. 

A new study from the Cato Institute finds that the law could cost as much as $4.67 trillion by 2050. That's roughly 12 times the stated cost. The study also concludes that the subsidies are undermining innovation and driving investments toward subsidy farming rather than satisfying consumer demand. 

“The government should not have a hold on the economy in such a way that it can truly distort entire markets, and that's what the Inflation Reduction Act is,” Joshua Loucks, research associate with Cato Institute and co-author of the analysis, said in a video explaining the study. 

The Trump administration has been executing a series of reviews of regulations that federal agencies passed during the Biden years. Repealing some agency decisions may require congressional action. Due to the massive costs and market-impacting effects of the IRA, the study’s authors argue Congress should take a hard look at it. The law, they say, should be fully repealed, or Congress should place limitations on the subsidies, which the IRA mostly lacks. 

Fact-finding endeavor

Loucks and his co-author Travis Fisher, director of energy and environmental policy studies at the Cato Institute, explained that the impetus for doing the study was the wildly varying estimates of the costs of the IRA that came out since its passage. While the CBO pegged the figure at $369 billion, Goldman Sachs estimated in May 2023 that it would be closer to $1.2 trillion. There were other estimates as well, all coming to different conclusions. 

“We decided to go on our own fact-finding endeavor here, and that's what resulted in this paper,” Loucks said. 

The subsidies for the IRA come in two forms — production tax credits (PTC), which provide tax credits per unit of energy produced, or investment tax credits, which provide tax credits for various investments in carbon-free energy. Which one developers take depends on the project and their business preferences. With the ITC, the subsidies provide an infusion of cash up front, whereas the PTCs provide payouts over time. 

Some of these are not capped, and others are only phased out when certain greenhouse gas emission reductions are met. Using models from the U.S. Energy Information Administration, the study shows there’s little likelihood that these reductions will be met in the next 25 years, meaning the subsidies have no meaningful end date. 

The authors estimated all the ITCs and PTCs that might come from the various carbon-free eligible projects — whether they be nuclear, wind, solar, geothermal, energy storage, green manufacturing or hydrogen — and using complex models, the authors came to some overall estimates. 

Over the next 10 years, according to the study, the IRA could cost taxpayers anywhere from $936 billion to $1.97 trillion. By 2050, it will cost between $2.04 trillion and $4.67 trillion. 

"Stackable" subsidies

Among the IRA’s stated goals was to create domestic supply chains feeding the so-called green energy transition, so the IRA includes a manufacturing tax credit. The 45X tax credit, as it’s designated, has a sub-component for the mining of critical minerals needed to make batteries, solar panels and wind turbines. That credit has no end date, so even if greenhouse gas emissions reductions were somehow met, the production tax credits continue so long as the mine produces minerals. 

“The real nightmare scenario for taxpayers is that these credits are stackable,” Loucks explained. 

As an example, Loucks and Fisher propose a mining company that produces lithium. It receives PTCs for the lithium it produces. That lithium is then used in a battery storage facility, which is only eligible for the ITC. If that battery facility provided energy storage for a solar farm, the solar farm would get production or investment tax credits. Then if that solar farm was used to produce green hydrogen, the company would get another PTC for the hydrogen. 

“There’s just endless ways to stack this, and that's going to result in taxpayers paying massive amounts of the burden,” Loucks said. 

Chasing subsidies

Fisher argues that these subsidies create incentives that point entrepreneurs toward finding creative ways to farm as many subsidies as possible. 

“The options for entrepreneurs are unlimited, which is part of the problem in terms of the incentive structure that this law builds. I think it takes the entrepreneurial spirit, the entrepreneurial spirit of Americans, and essentially turns them towards chasing subsidies instead of satisfying consumer demand,” Fisher said. 

There are other questionable incentives built into the IRA. A wind farm is only eligible for the PTC for 10 years of its life unless it’s refurbished — called "repowering" — in which case the IRS treats it as a new project with another 10 years of PTCs it can tap into. This incentivizes investments in refurbishing well before the end of the wind turbines’ lives, the study argues.  

Mitch Rolling and Isaac Orr, founders of Always On Energy Research, examined how the repowering rules impacted wind farms in Minnesota in an article on their “Energy Badboys” Substack. Using data from the Department of Energy, Rolling and Orr found that turbines repowered in Minnesota wind farms were anywhere from 9 to 16 years old, with the median age being 10 years.

“In essence, the lucrative federal subsidies paid to wind turbine operators are creating a perverse incentive to prematurely refurbish or replace wind projects long before the end of their useful lifetimes,” the analysts wrote. 

Big business opportunities 

These tax credits, Loucks and Fisher explain, are also largely inaccessible to small businesses, meaning most of the subsidies will go to large corporations. The regulations sometimes involve 100-page guidelines that come up multiple times per year, and if a company doesn’t have a legal counsel team to work through them, it can’t pursue these opportunities. 

“This is 600 pages of dense legal regulatory code that no average or small business could ever understand, comply with or take advantage of,” Loucks said. 

Loucks said that there are companies that exist for the sake of taking in these subsidies. Consumers don’t have a demand for their product, such as green hydrogen, and they wouldn’t exist without the tax credits. “But they get enough money from the government to keep afloat, and basically they just profit off taxpayers,” Loucks said. 

Full repeal

Loucks said that inflation likely played a role in President Donald Trump’s successful campaign, and pre-election polls showed voters rating inflation high on their concerns. “The reason inflation has been so bad, plain and simple, is because of government spending,” Loucks said.

Not only does the IRA just pile on more government spending, he said, it doesn’t do anything to address climate in any meaningful way. “It just funnels money to special interest groups and does nothing to really address how we're going to transform our economy in a way that is equitable and beneficial for all Americans,” Loucks said. 

The study’s authors argue that, in light of the IRA’s actual costs, a full repeal of its energy subsidies is needed. If a full repeal isn’t possible, Congress should limit taxpayer liabilities by placing caps on the dollar value of the subsidies, add expiration dates instead of emission reduction targets — or both. 

“Delaying action only strengthens the political and economic interests tied to its subsidies, making reform even more difficult as the web of government handouts expands,” Loucks and Fisher warn in an article on “The Fishtank,” Fisher’s Substack.