The Elective Pay (also called Direct Pay) program — established under the Inflation Reduction Act (IRA) — is designed to provide clean energy tax credits directly to eligible entities, including local governments. This program is a game-changer for cities, towns and villages looking to advance clean energy projects without relying on traditional tax equity financing. Recent updates provide key insights for local governments eager to benefit from these incentives.
The Internal Revenue Service (IRS) has shared that more than 600 state and local governments have filed to receive reimbursement for clean energy projects through the elective pay provision. These projects span all 50 states, as well as U.S. territories.
What is Elective Pay?
Elective Pay allows tax-exempt entities (such as municipalities) to receive certain clean energy tax credits as direct payments back to the community. Local governments are eligible for 12 tax credits for clean energy investment or production, such as the purchase of electric vehicles, alternative fuel projects and solar panel installations.
How Can My City Apply for the Elective Pay Tax Credit?
The deadline to file for Elective Pay is the due date of your city’s tax return.
Jan – Dec
Fiscal/Tax Year:
May 15
Deadline
July – June
Fiscal/Tax Year:
November 15 Deadline
Oct – Sept
Fiscal/Tax Year:
February 15 Deadline
For cities with a calendar year fiscal year/tax year, that means May 15. For cities with a July–June fiscal year/tax year, the filing deadline is November 15. For communities with an October 1 fiscal year start, the filing deadline is February 15. Regardless of the fiscal year, communities also have the option to select the calendar year as their tax filing year for simplicity.
NLC, in collaboration with the Government Finance Officers Association, created a simple step-by-step instruction manual to guide your city through the filing process. A blog overview of the guide can be found here.
Has Elective Pay Been Impacted by the Federal Funding Freeze?
No. Elective Pay has not been affected by any executive orders or potential federal funding freezes. The tax credits are part of the U.S. Code and cannot be rescinded through agency or executive action. Any changes would require legislation passed by Congress.
However, Elective Pay is currently being considered as a funding offset for the tax extension bill that Congress is working on. Provisions under the Inflation Reduction Act, which created Elective Pay, are particularly vulnerable to cuts this year.
For example, in the last Congress there were over 50 votes in the House and one vote in the Senate to repeal parts of the IRA. Additionally, while the House passed 20 bills last Congress to repeal or constrain the IRA, several House Republicans signed a letter to Speaker Johnson expressing “support an all-of-the-above approach to energy development and tax credits that incentivize domestic production, innovation, and delivery from all sources.”
How Can Local Leaders Help Protect Elective Pay?
The best way to protect Elective Pay is to highlight its importance and impact. Unlike federal grant programs, the IRS has not disclosed which entities have received the tax credit nor the project uses, making success stories from local leaders more critical to advocacy efforts.
NLC has partnered with organizations to collect information on clean energy projects that have benefited from Elective Pay. Please share your project data using this simple form to help us build out a public dashboard showing the impact of elective pay.
Additionally, if your community has already filed for elective pay, email us at advocacy@nlc.org to let us know when you receive the reimbursement and the amount. Your input helps us fight to protect Elective Pay and ensure cities, towns and villages have funding and financing streams for clean energy projects.
NLC is actively demonstrating to Congress the significant impact these funds have on local communities. Earlier this month, 133 local elected officials signed a letter urging Congress to preserve the clean energy tax credits from the Inflation Reduction Act.
Local leaders, let your members of Congress know how your community has benefited from elective pay and other clean energy programs from the IRA.
The Direct Pay program offers unprecedented opportunities for local governments to fund clean energy projects, reduce carbon emissions and invest in sustainable infrastructure. As cities, towns, and villages look ahead, Direct Pay can serve as a cornerstone for achieving ambitious energy and climate goals.
Resources from the National League of Cities
Local leaders can also view the recording of our webinar, “How Cities Can Take Advantage of Direct Pay,” made in partnership with the BlueGreen Alliance, the Center for American Progress and Lawyers for Good Government.
Resources from the Government Finance Officers Association
- Webinar recording: Inflation Reduction Act Elective Pay: Learn How to Claim & Receive Payment and slides (April 18, 2024)
- Lighthouse Cohort Partner Resources
- Demystifying the Elective Pay Filing Process (PDF)
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