‘Direct Pay’ Tax Credits Bring Clean Energy and So Much More to US Communities

The U.S. Inflation Reduction Act's "direct pay" provision offers communities across the country access to clean energy tax credits for the first time. Just two years after it was introduced, direct pay is already helping to bring clean vehicles to city fleets, fund electric vehicle chargers for low-income neighborhoods, provide cost-effective solar power to wastewater plants, and help schools upgrade outdated and inefficient HVAC systems.

But clean energy deployment is hardly the only benefit. Projects receiving direct pay credits are creating good-paying jobs, reducing air pollution, cutting energy costs, creating lasting sources of capital for future community projects, and working to increase the U.S. energy supply at a time of record electricity demand growth. These benefits are happening in both large cities and small towns, across red and blue states and districts.

For example, 27 cities alone have claimed an estimated $12.66 million in tax credits for their 2023 projects by working with the Lighthouse Cohort, a partnership between WRI, Lawyers for Good Government, Government Finance Officers Association, Urban Sustainability Director's Network, Southeast Sustainability Director's Network and the Electrification Coalition.

Here, we demystify the Inflation Reduction Act's direct pay provision and analyze some of its emerging benefits.

What Are the Inflation Reduction Act's Direct Pay Clean Energy Tax Credits?

Direct pay, also known as "elective pay," enables tax-exempt entities to qualify for federal clean energy tax credits that are then received as direct cash payments from the IRS. While federal tax credits for clean energy have been around for decades, they were largely unavailable to tax-exempt organizations like municipal governments and non-profits that did not have tax liability for the credit to apply to. Direct pay "allows tax-exempt entities [...] to receive the same funding for clean energy projects that private industry has been receiving for decades," said Jillian Blanchard, director of Lawyers for Good Government's climate change and environmental justice program.

To claim the credits, tax-exempt entities file a tax return with the IRS on qualifying projects or purchases completed or "placed in service" in the previous fiscal year. The credit money is then received as a check or direct deposit. Just like personal tax returns, the money does not have any restrictions or reporting requirements, meaning it could be used for anything from supporting general operations to funding future sustainability projects.

The program currently allows for 12 clean energy and electrification-related credits for technologies like electric vehicles (EVs), EV charging stations, solar panels, wind turbines and battery storage. Organizations that can claim tax credits through direct pay include religious institutions; school districts; rural electric cooperatives; non-profits; and state, local and tribal governments and their associated agencies, including public power utilities.

The Many Benefits of Using Direct Pay Clean Energy Tax Credits

Just two years in, direct pay is already changing the playing field for eligible organizations.

School districts across the U.S. are claiming direct pay on hundreds of projects, including solar panel installations and electric school buses. One school district in Kentucky received over $739,000 through direct pay on a new geothermal HVAC system.

Non-profit and faith institutions are benefiting as well. With support from direct pay, the Watts-Willowbrook Church of Christ in Compton, Calif., recently installed a 12-kilowatt (kW) rooftop solar system that is expected to save the church $184,033 in energy bills over the next 20 years. Baltimore's City of Refuge non-profit installed over 100 kW of solar panels and battery energy storage through a direct pay tax credit, allowing it to reinvest its energy bill savings and act as a centralized community services hub during natural disasters.

And direct pay isn't just for small, local projects. The Oceti Sakowin Power Authority, a joint non-profit corporation composed of seven Sioux tribal nations in South Dakota, is using direct pay to ensure they maintain full ownership and benefits from two massive wind farms totaling 570 megawatts (MW) in capacity. When completed, the project will be one of the largest wind power installations in the United States and will generate enough electricity to power more than160,000 homes per year.

Rural electric co-ops and public power entities are also using direct pay for clean energy. In Massachusetts, a 6.9 MW solar array serving six municipal utilities received $2.34 million in tax credit money through direct pay, reducing electricity costs for utilities and the communities they serve. In December 2024, Tri-State Generation and Transmission Association, an electric co-operative power supplier serving customers across Colorado, New Mexico, Wyoming and Nebraska, announced the construction of a 145 MW and 110 MW solar facility. Tri-State expects to receive 40% of its construction costs back through direct pay.

How Are Local Governments Using Direct Pay for Clean Energy?

With over 90,000 local governments across the U.S., direct pay offers a substantial opportunity for towns, cities and counties nationwide to unlock billions of dollars of funding and long-lasting economic benefits for their communities. Some are already capitalizing on the credits.

In 2023, San Antonio, Texas finalized a deal to procure 13.1 MW of solar across 42 separate sites. Direct pay enabled the city government to move forward with the plan and own all of the solar installations, which are collectively expected to save the city $7-$11 million in energy costs over the next 25 years. The deal also created 15-17 full-time jobs and is expected to reduce heat in city parking lots by installing 23 solar parking canopies.

Through the Lighthouse Cohort, WRI and its partners have worked directly with 27 local governments to date to help them file for tax credits through direct pay. Participants have already or will soon claim at least 840 projects for their 2023 tax years, including 677 EV projects, 113 EV charger projects and 50 solar projects. On average, local governments participating in the Cohort are claiming $308,739 in tax benefits for their 2023 projects.

A few cities using direct pay include:

Pateros, Washington

Located at the meeting of the Methow and Columbia rivers in Central Washington state, Pateros is a small city of 611 people, known for its natural beauty and abundant recreation. It boasts almost 200 days of sunshine a year, making it an ideal location for solar power. The city government aimed to power its reservoir and wastewater treatment plant through solar, but it faced a funding shortfall.

Even with a combination of public and private grants, the city still needed tens of thousands of dollars to cover remaining costs. By using direct pay to file an Investment Tax Credit, as well as claiming a bonus for using solar panels manufactured in Washington state, Pateros received the funding it needed to cover 100% of project costs and maintain ownership over the solar array. The town's new 53-kW solar system will now directly provide power to its water reservoir and wastewater treatment plant, reducing its energy costs by over 45%.

Buncombe County, North Carolina

Tucked into the Blue Ridge Mountains and home to the city of Asheville, Buncombe County, North Carolina used a direct pay filing for 19 solar projects placed in service in 2023. Spread across schools, county administrative buildings, public safety facilities, a library, and a local community college, these solar panels will reduce operating costs by guaranteeing sustainable, reliable, low-cost energy relative to existing utility bills.

Direct pay returns are also helping the county manage its response to Hurricane Helene, which displaced thousands of people and caused billions of dollars in damages to Western North Carolina in September 2024. Since tax credit checks received through elective pay are not earmarked for specific purposes, the over $1 million Buncombe received and helped other organizations claim provided much-needed cash relief. "Elective pay returns could not come at a better time for the community," said Jeremiah Leroy, Buncombe County's director of the office of sustainability. "These are much-needed funds to continue normal operations, much less the recovery effort over the coming years."

Direct pay is also shaping future disaster response and resiliency efforts. In the aftermath of Hurricane Helene, Buncombe County is piloting battery storage projects to help provide power to critical community facilities during future outages.

"The biggest thing that I think about is how to create opportunities to build back better as a more resilient community," said Leroy. "And having elective pay will make that ... a possibility."

Philadelphia, Pennsylvania

Philadelphia has been a leader in sustainability since 2016, when the city committed to halving municipal emissions by 2030. In 2021, the city's office of sustainability completed the first version of the Philadelphia Municipal Clean Fleet Plan, laying out a strategy to shift the city's 6,300 vehicle fleet to clean and electric vehicles.

The Inflation Reduction Act's direct pay provision enabled access to the recently introduced Commercial Clean Vehicle Credit, which allows qualifying entities to receive up to $7,500 for every light-duty battery-electric or plug-in hybrid vehicle they purchase. The city qualified for just over $1 million in tax credits on the more than130 battery electric vehicles they purchased in 2023. These vehicles will help Philadelphia avoid around 426 metric tons of greenhouse gases per year, equivalent to burning almost 500,000 pounds of coal or charging 34 million smartphones.

Dan Gasiewski, Philadelphia's chief grants officer, noted that funds will bolster city operations and sustainability initiatives.

Direct Pay Is a Critical Resource for US Communities

Thanks to direct pay, cities, school districts, rural electric co-ops, religious institutions, public power utilities, and other tax-exempt organizations across all regions of the U.S. can now receive the full value of incentives for undertaking clean energy and electrification projects. These incentives are being directly re-invested into communities, while at the same time enabling larger and more impactful projects that decrease emissions, create jobs, and provide enough power to meet skyrocketing energy demand.

However, direct pay and clean energy tax credits face an uncertain future. Incoming President Donald Trump, who takes office this month, has long criticized clean energy and publicly stated his intention to repeal the Inflation Reduction Act. Some Congressional Republicans have also signaled interest in changing or rescinding clean energy tax credits, though this would require passing new legislation. At the same time, many Republican districts across the country have seen enormous levels of investment, job creation, and benefits because of the Inflation Reduction Act's investments. . Without provisions such as direct pay, communities and the institutions that serve them will be stuck with higher costs and fewer opportunities. That's why 18 Republican Congressmembers have already voiced their opposition to repealing clean energy tax credits.

"The economic benefits of the Inflation Reduction Act are being felt across the country," Blanchard said. "If any future administration attempts to remove these [...] credits, it will cause significant economic and environmental impacts across the political divide, particularly in rural districts."

As a growing number of examples show, investments in the clean energy economy benefit everyone. Through clean energy tax credits and direct pay, the U.S. can be the world's lighthouse, illuminating the path toward a bright, clean and resilient energy future.