Why the Inflation Reduction Act Matters to State and Local Government

The US Inflation Reduction Act (IRA) was signed into law in August of 2022. The bill includes $790 billion in revenue and savings to fund federal deficit reduction and approximately $485 billion in new spending, which includes some $385 billion in new energy and climate-related programs over 10 years and $100 billion to pay for a three-year extension of the Affordable Care Act healthcare premium tax credits.

While there is some debate about the bill’s actual effect on inflation in the short term, one thing that is clear is that this is the federal government’s largest investment ever for climate infrastructure. Independent analyses estimate that the IRA will cut greenhouse gas (GHG) emissions some 40% by 2030, compared to a 2005 baseline. That is a significant move toward reaching the Biden Administration’s targets on decarbonization.

These reductions promise to result from federal government-created incentives for the private sector to address a number of areas of climate need, including energy efficiency, clean energy, and electric transportation, to name a few. Acknowledging the potentially disruptive effects of the climate transition, the bill also includes provisions for green job creation and training, and support for low-income and disadvantaged communities.

But what does the IRA, which has been called one of the most significant pieces of legislation ever, mean for state and local government? While much of the funding in prior recovery and rebuilding legislation such as the Infrastructure Investment and Jobs Act (IIJA) was allocated through formula grants to states, local governments and tribes, the IRA will allocate significant funding through competitive grants. Energy, the environment, and local infrastructure are all key areas of the IRA that state and local governments need to understand and prepare to access opportunities.

Here are just some of the key grant programs and why they matter to state and local governments.

Energy:

• $4.3 billion for grants to state energy offices to implement a Home Owner Managing Energy Savings tax rebate program, giving tax relief to homeowners who reduce their energy use by investing in “whole-house energy savings retrofits.” Rebates are based on the reduction in energy usage. Funds are allocated in accordance with the State Energy Program in effect on January 1, 2022.
• An additional $4.27 billion in grants to state energy offices to carry out the High-Efficiency Electric Home Rebate Program, giving tax relief to homeowners who reduce electricity usage through appliance and non-appliance (e.g., insulation, wiring) upgrades. Rebates are based on purchase costs.
• $200 million for states to develop training programs for contractors involved in the installation of home energy and electrification improvements.
• $760 million for grants to state, local, and tribal governments and other entities to support accelerated siting of interstate electricity transmission lines.

Environment, Environmental Justice, and Climate:

• $27 billion for the Greenhouse Gas Reduction Fund with at least 60% of these funds focused on disadvantaged communities. Included in this fund are:
  • $7 billion for use through September 2024 in competitive grants to states, municipalities, and tribes for providing grants, loans, or other forms of financial assistance, as well as technical assistance, to enable low-income and disadvantaged communities to deploy or benefit from zero emissions technologies, including distributed technologies on residential rooftops, and to carry out other GHG emissions reduction activities.
  • $12 billion for use through September 2024 to make grants on a competitive basis for direct and indirect investments in eligible nonprofits for the rapid deployment of low and zero emissions products, technologies, and services. These funds are to be used at the national, regional, state, and local level.
  • $8 billion for use through September 2024 to “enable low-income and disadvantaged communities” to deploy or benefit from zero emission technologies and other GHG  reduction activities through grants, loans, and other financial assistance. Eligible participants are nonprofit organizations that are funded by public or charitable contributions for projects at the national, regional, state, and local level.
• $5 billion for Climate Pollution Reduction Grants ($250 million for planning and $4.75 billion for implementation). A grant will be made to at least one eligible entity in each state for the costs of developing a plan for the reduction of GHG air pollution. The applications for each implementation grant must include information regarding the degree to which GHG air pollution is projected to be reduced in total and with respect to low-income and disadvantaged communities.
• $3 billion for Environmental and Climate Justice Block Grants for community-led projects in disadvantaged communities and community capacity building centers to address disproportionate environmental and public health harms related to pollution and climate change.
• $315 million to reduce air pollution under the Clean Air Act, including for air-quality monitoring grants and adopting and implementing GHG and zero emission standards for mobile sources.
• $50 million for technical assistance and grants to monitor and reduce air pollution and GHG emissions at schools in low-income and disadvantaged communities.

Local Infrastructure:

• $3 billion for Neighborhood Access and Equity Grants to reconnect communities divided by existing infrastructure barriers, mitigate negative impacts of transportation facilities or construction projects on disadvantaged or underserved communities, and support equitable transportation planning and community engagement activities.
• $1 billion for improving energy efficiency, water efficiency, or climate resilience of affordable housing. Public housing authorities can participate.
• $1 billion to cover cost of zero emission school buses, garbage trucks, and mass transit buses.
• $1 billion to state and local governments to adopt improved building codes (FY 2022 – 2029).

Why this funding matters to state and local governments

When fully implemented, the IRA promises to reduce carbon pollution significantly from current levels—a 40% reduction by 2030; it anticipates the creation of new jobs in the “green economy”; and it will invest billions in communities that have experienced long-standing environmental and health challenges.

Along with states and counties, mayors and their cities are increasingly managing climate-related impacts, from 100-year storms to heat waves and ice storms. Climate-related events increasingly influence state and municipal operations, housing, infrastructure, and health.  

For the first time, states and municipalities will now receive a meaningful injection of federal dollars to address these challenges and improve the lives of their citizens.

In light of the individual benefits included under the IRA such as the $9 billion in consumer home energy rebates for energy-efficient retrofits to low-income consumers, and the new benefits to industry and business such as the $10 billion tax credit program to build clean technology and manufacturing facilities, the IRA allows state and local governments to work with business and consumers for maximum impact of government expenditures. Most noteworthy is that the competitive nature of the grants throws down the gauntlet for state and local governments to secure first-mover advantage in the competition for the opportunities of the green economy.

State and Local Governments Need to Plan for IRA Grant Opportunities

Planning is everything. Now that Congress has appropriated funds to the federal agencies that will administer the IRA programs, agencies will be required to develop program criteria and issue Notices of Funding Opportunities. This process will take anywhere between 60 and 180 days for many programs, as contemplated by the new law. This timeframe allows state and local government to review their strategic priorities and evaluate existing plans to identify programs that may align with IRA funding. 

How Guidehouse Can Help

Funding under the IRA will be released through various federal agencies on different timetables. Some of the funding must be expended as early as the end of 2024, while other funds will be available through December 2031. The availability of IRA grants will also cause state and local governments to consider how these funds can and should be mixed with their planned use of other state and federal funds.

We understand federal funding: Guidehouse has the experience, resources, and technology to interpret and help prioritize and manage this influx of federal funds, as well as leveraging them with other state and federal funds to maximize impact and meet federal matching requirements. We work with clients to ensure that benefits from funding sources are maximized, tapping funding streams in an order of applicability from state-specific and federal targeted programs (American Rescue Plan Act (ARPA), IIJA) to mixed-use funds (capital projects and Broadband Equity and Deployment) to funds of general applicability (ARPA, State and Local Fiscal Recovery Funds, and general funds). We regularly work with state and local clients to assist with the planning, application, and implementation cycles for federal funds and support assessments, procurement, capacity building/stakeholder engagement, and strategic communications.

We design, implement, and operate grants management programs: Our team has significant experience with grants management, from the design of technology-based portals to the review of all grant requirements in accordance with the Federal Uniform Guidance, 2 CFR Part 200, as well as all program requirements and guidance issued by federal agencies. We also fully understand and support monitoring, reporting, and compliance requirements. We have performed these services for more than 40 state and local governments relative to numerous federal funding sources, including all COVID-19-related response, recovery, and rebuilding legislation. Guidehouse has a team of professionals nationwide who form our Center of Excellence, which closely monitors federal legislation to track and analyze each release of regulations and guidance.  

We engage with clients locally and with key stakeholders and communities: The successful pursuit and implementation of large federal grants is often tied to community understanding and support. Many of the funding opportunities offered by the IRA involve impactful investments in our nation to address long-standing and urgent climate, energy, and local infrastructure needs, including for disadvantaged communities. Guidehouse works locally with our clients to create a winning strategy and engages with the local community to ensure successful grant pursuits and post-award implementation. 

We advise on the strategic opportunities around infrastructure investment and creating the net-zero economy: Our team has worked with a number of state, local, and national governments on developing strategies to secure first-mover advantage in the net-zero economy. Whether it is around vehicle electrification, renewable energy, or hydrogen, our team members are experts at macroeconomic and industrial strategy, and private sector development, advising dozens of clients on how to build-out the ecosystem of infrastructure, institutions, and talent that will be the economic hubs of the net-zero economy.