For more than a century, the government has used energy tax incentives (credits, deductions, exemptions, and refunds) as a tool to advance energy policy goals. These tax incentives range from subsidies for oil and gas to credits for installing insulation in homes and incentives for renewable energy production. Energy tax incentives can be used to encourage national goals, but they also add to federal deficits by decreasing the amount of revenue coming into the government.
In July, 2025, as part of the One Big Beautiful Bill Act (OBBBA), lawmakers rolled back existing incentives in order to partially offset its deficit impact. In the legislation, lawmakers eliminated a range of renewable energy tax incentives previously enacted as part of the Inflation Reduction Act (IRA), reducing the overall cost by a projected $496 billion over the 2025–2034 budget period. Even with this offset, the bill is still anticipated to add $4.1 trillion including interest to the national debt over the next decade.
Energy Tax Incentives in the Inflation Reduction Act
The 2022 Inflation Reduction Act dramatically expanded energy tax incentives. Energy tax incentives date but for more than a century, the cost of those incentives remained modest, averaging 0.04% of GDP from 1994–2022. In 2023, the IRA caused energy-related tax expenditures to triple from their 2022 amount, reaching 0.21% of GDP.
According to the Congressional Research Service, the IRA modified and extended 13 energy tax provisions and added 9 new provisions. The modifications to existing provisions accounted for a majority of the projected $622 billion cost of the bill from 2024–2031. These changes expanded the number of taxpayers who qualified for credits and allowed taxpayers with lower tax liabilities to receive larger portions of the tax credits than before.
These changes included:
- Technology neutrality: The IRA shifted from incentivizing specific technologies, such as wind and solar, to mainly basing tax benefits on the amount of energy produced. The change allowed tax incentives to accommodate evolving energy technologies without requiring continual legislative updates.
- Transferability and refundability: The IRA made most energy tax credits refundable or transferable, which allows entities without sufficient tax liability, such as startups, to either sell credits to other taxpayers for cash or receive tax refunds through a process called “elective pay” to receive the full value of the tax credit when credits exceed tax liability.
- Energy community bonus: The energy community tax credit bonus provides up to a 10 percent increase for qualifying projects in "energy communities," which includes brownfield sites (contaminated properties), communities with significant fossil fuel industry presence and high unemployment, and census tracts with recently closed coal facilities.
The chart below illustrates seven significant provisions that incorporate these structural changes.
Energy Incentives Terminated by the One Big Beautiful Bill Act
Most of the IRA’s energy incentives Instead of letting them sunset, the OBBBA terminates most of these programs in 2026 or earlier, generating $496 billion in savings over ten years.
Cost Savings
The vast majority of cost savings in the legislation derived from three changes:
- Termination of clean vehicle credits generates the largest savings at $190 billion by terminating four vehicle-related tax credits. Three are terminated effective September 30, 2025: the previously owned clean vehicle credit for used electric vehicles (EVs), the new clean vehicle credit for new EVs, and the qualified commercial clean vehicles credit for commercial vehicles. The alternative fuel vehicle refueling property credit will be terminated effective June 30, 2026.
- Termination of the clean electricity investment credit saves $166 billion by phasing out a credit for zero-emission electricity facilities and energy storage. Wind and solar facilities must begin construction by July 4, 2026, and be operational by December 31, 2027, to remain eligible, while other technologies like hydropower, nuclear, and geothermal face graduated phase-outs until
- Termination of the residential clean energy credit produces $77 billion in savings by terminating the tax credit for residential solar electric property, solar water heating, fuel cells, small wind energy, geothermal heat pumps, and battery storage systems installed after December 31, 2025.
Exceptions
Although most of the energy tax changes under the OBBBA raise revenues, there are some provisions that increase expenditures. The most expensive of which is the extension of the clean fuel production credit through 2029. That credit applied to producers of transportation fuel derived from feedstock grown in the United States, Mexico, or Canada and will lower revenues by $26 billion over the next 10 years.
Conclusion
The One Big Beautiful Bill Act illustrates how tax policy remains a tool for lawmakers to advance energy policy objectives, whether expanding incentives to promote energy outcomes or restricting them to generate revenue. While the OBBBA's restriction and repeal of energy tax incentives successfully offset $496 billion in costs, this represents only a fraction of the bill's $4.1 trillion price tag, demonstrating that if lawmakers are serious about addressing the explosive growth in national debt, they must consider comprehensive fiscal solutions beyond energy tax reform alone.
Photo by Brandon Bell/Getty Images
Further Reading
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