6 Things For State and Local Governments to Watch With Democrats' Climate and Tax Deal

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With billions in proposed spending, the package could affect both government programs and regional economies.

The unexpected climate and tax deal Democrats in the U.S. Senate announced this week raises the possibility of billions in new federal spending that would help to support state and local government programs, while also potentially spurring new economic development and jobs around the country.

Central to the plan is $369 billion for programs meant to cut carbon emissions, restore land, reduce pollution in disadvantaged neighborhoods, lower energy costs and strengthen domestic manufacturing of products like wind turbines and electric vehicles. On the revenue and savings side, estimates released by Democrats show the bill would raise $739 billion through a mix of drug pricing reforms and tax measures, including a 15% corporate minimum tax.

Democrats say the deal would not increase taxes on households earning up to $400,000 a year or small businesses. And the watchdog group Committee for a Responsible Federal Budget says the bill would reduce federal deficits by more than $300 billion over a decade.

[For Route Fifty's full coverage from Capitol Hill on Thursday about the tax and climate package CLICK HERE.] 

U.S. Sen. Joe Manchin, a moderate Democrat from West Virginia, reached the deal with Senate Majority Leader Chuck Schumer. Manchin holds a key vote in the evenly divided Senate and previously dashed his party's hopes of enacting a more ambitious domestic spending package known as Build Back Better, citing concerns about inflation and the national debt.  

Notably, Manchin signaled Wednesday that he does not support lifting the $10,000 cap on a federal tax deduction for state and local taxes as part of the legislation. Doing so has been a priority for many Democrats from states like New York, California and New Jersey. The bill is likely their one foreseeable shot to change the cap.

President Biden, meanwhile, has endorsed the package, describing it as "the most significant legislation in history to tackle the climate crisis and improve our energy security." Lawmakers are calling the bill the Inflation Reduction Act, a recognition of how rising prices for gasoline and other basic goods are hitting Americans' wallets.

Here's an initial look at how some parts of the legislation could be noteworthy for state and local governments.

1. Home electrification and efficiency. The legislation includes a slate of programs intended to make homes more efficient and less reliant on appliances like natural gas furnaces. For instance, there's a decade's worth of consumer tax credits that would help offset households' costs of installing equipment like heat pumps, rooftop solar panels and electric water heaters.

There's also $9 billion in rebates targeting lower-income Americans, designed to help them with electrifying home appliances and retrofitting their homes to use less energy. And there's $1 billion for grants to help with energy efficiency upgrades for affordable housing.

In recent years, a growing number of localities have taken steps to restrict natural gas hookups in new construction, and some states have moved to tighten efficiency standards in their building codes. The programs in the Senate bill would fit with those state and local trends.

2. Electric vehicles. The package includes a tax credit of up to $7,500 for new electric vehicle purchases and $4,000 for buyers of used ones. An existing federal tax credit that ranges from $2,500 to $7,500 phases out as manufacturers sell 200,000 of the vehicles eligible for it.

The newly proposed credits would compliment state efforts. Forty-five states and Washington, D.C., provide incentives for certain electric or hybrid vehicles, according to the National Conference of State Legislatures. And some, including California and Washington, have set goals for phasing out new gas-powered cars in the years ahead.

States and localities will also have a continued part to play in planning for the rollout of the additional EV chargers that will be needed if more and more Americans buy the vehicles. 

3. Manufacturing boost. States have competed in recent months, offering up tax incentives and other perks, to attract electric vehicle factories. The legislation could stir more action in the industry. Democrats say their package provides over $60 billion to grow U.S. manufacturing of EVs, as well as goods like wind turbines, solar panels and heat pumps. This part of the plan includes up to $20 billion in loans to build "clean vehicle" plants around the country, as well as tax credits to incentivize onshore manufacturing of various products.

Separate legislation the House sent to Biden's desk on Thursday would provide about $52 billion of subsidies to support the U.S. semiconductor industry. Taken together, the two bills would offer a substantial boost to domestic manufacturing with implications for tax revenues and jobs in communities around the U.S.

4. Environmental justice. The Democrats' summary of the bill says it includes about $60 billion for environmental justice programs that will seek to address pollution and other issues in disadvantaged communities. This includes $3 billion in environmental and climate justice block grants. Local governments partnering with nonprofit groups would be eligible for the grants, which could go to programs like those combatting air pollution, urban heat islands and wildfire.

Among the other funding: $3 billion to reduce air pollution from shipping ports and $1 billion to switch heavy-duty vehicles like transit buses and garbage trucks to models that produce less emissions.

5. Conservation and restoration. The package includes $5 billion to conserve forests, improve the resilience of woodlands against wildfire and to plant trees in urban areas. There's also $2.6 billion in grants to protect and restore coastal areas and over $20 billion to promote more climate-friendly agriculture practices, according to the summary.

6. SALT deduction. "Our tax code should not favor red state or blue state elites with loopholes like SALT," Manchin said when he announced the legislation, referring to the federal deduction for state and local taxes now capped at $10,000. Republicans imposed that limit during their 2017 tax overhaul and since then some Democrats from states with higher taxes have fought to get it dialed back.

Last year, the deduction turned into a sticking point as Democrats tried unsuccessfully to reach agreement on their Build Back Better package, with lawmakers putting forward a series of proposals to rework the cap. It remains to be seen how hard SALT supporters will press for the cap to be lifted as part of any forthcoming negotiations or how much leverage they'll have. As Route Fifty reported Thursday, Schumer doesn't sound bullish on the cap getting lifted as part of the deal.

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