backSince the enactment of the Inflation Reduction Act of 2022 (the “IRA”) in the United States, the Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) have issued notices of proposed regulations (“NPRMs”) and other guidance on key investment and production tax credit provisions of the IRA. Most recently, Treasury and the IRS released an NPRM for the new clean hydrogen production tax credit under Section 45V of the Internal Revenue Code of 1986 (the “Code”). Section 45V was by far the most intensely debated energy tax credit provision of the IRA, as evidenced by more than 29,000 comments submitted during the comment period which ended on February 26, 2024.
This unprecedented public focus on a technical tax regulation and the associated high stakes debates have also generated increasing interest in the federal rulemaking process in the United States. This client alert provides a brief overview of the federal rulemaking authority and the procedures that federal agencies in the United States are required to follow in writing regulations.
Background
Federal authority to regulate rests with U.S. Congress and is delegated to a federal agency through law. Federal agencies such as Treasury, Department of Labor and Department of Energy derive their authority to issue regulations from laws enacted by Congress. The IRS is a bureau of Treasury organized to carry out some of the responsibilities of the secretary of Treasury.
The statutory basis for a regulation may differ greatly in terms of its specificity. Some statutes may state only the general intent of the legislation and give rulemaking agencies a significant discretion as to how to implement Congress’s intent. Other statutes may specifically delineate what an agency’s rules should require and impose specific procedural requirements on the agency’s rulemaking processes, such as holding public hearings or publishing an NPRM by a particular date. For example, Section 45V(f) of the Code required that Treasury “shall issue regulations or other guidance to carry out the purpose of this section, including regulations or other guidance for determining lifecycle greenhouse gas emissions” no later than 1 year after the date of the enactment of section 45V (August 16, 2023). The Treasury and IRS did not issue their NPRM until months later on December 22, 2023.
A voluminous set of procedures and requirements has been developed by Congress and various Presidents to guide the federal rulemaking process. Some of these procedures and requirements apply to nearly all federal agencies while others are agency or program specific. Collectively, they require rulemaking agencies to take a wide range of procedural, consultative, and analytical actions, which could cause the final rules to take years to develop and be published.
Rulemaking Process
The Administrative Procedure Act (“APA”) of 1946 sets forth the most broadly applicable federal rulemaking requirements.15 U.S.C. § 551 et seq. Federal rulemaking is also governed by other statutes besides the APA as well as executive orders and Congressional actions. For example, the Federal Register Act (44 U.S.C. Chapter 15) established a uniform system for handling agency regulations. The Federal Register Act and regulations promulgated thereunder require the agencies to file documents with the Office of the Federal Register and to publish the documents in the Federal Register, among others. Publication of a rule in the Federal Register provides official notice of its existence and contents. The APA describes rulemaking as the “agency process for formulating, amending, or repealing a rule.”2The terms “rule” and “regulation” are often used interchangeably in discussions of the federal regulatory process. Rules that fall within the scope of the agency’s delegated authority and that comply with certain requirements have the force and effect of law.
The APA covers both formal and informal rulemaking. Rules are typically promulgated through the informal rulemaking process. Formal rulemaking is generally used in ratemaking proceedings and in certain other cases when rules are required by law to be made “on the record” after an opportunity for a trial-type hearing. In informal rulemaking, agencies are required to publish an NPRM in the Federal Register and provide the public with a meaningful opportunity to comment on the rule’s content.
Some agencies also publish an NPRM in which the agency notifies the public that it is considering an area for rulemaking and often requests comments on the appropriate scope of topics of the rule. For example, the Federal Trade Commission must publish an advance NPRM in the Federal Register and allow the public to provide comments and alternative suggestions. After an NPRM is issued, agencies may also issue a “supplemental notice of proposed rulemaking” in order to obtain public comment on new factual proposals before issuing a final rule.
The APA requires NPRMs to contain certain information, including (1) a statement of the time, place, and nature of public rulemaking proceedings; (2) reference to the legal authority under which the rule is proposed; and (3) either the terms or substance of the proposed rule or a description of the subjects and issues involved.
Once adequate notice is provided, the agency must allow interested persons to comment on the proposed rule through the submission of written comments, data, views, or arguments. The APA does not specify the length of the public comment period, but agencies commonly allow at least 30 days, and for “significant” rules up to 60 days. Public comments and other supporting materials such as hearing records are placed in a rulemaking docket on regulations.gov which must be available for public inspection.
Once the comment period has closed, the agencies are required to consider the relevant matter presented and incorporate into the adopted rule a “concise general statement” of the “basis and purpose” of the final rule.35 U.S.C. § 553(c). In practice, the general statement of basis and purpose is typically described in lengthy preambles to the final rules. The agency is not required to include a response to every comment received and only responds to “significant” comments, with Proposed final agency regulatory actions must be submitted to the Office of Information and Regulatory Affairs (“OIRA”), a division within the Office of Management and Budget (“OMB”), which in turn is within the Executive Office of the President.4The OIRA review process was originally introduced by President Ronald Reagan in Executive Order 12291 and was later modified by Executive Order 12866, issued by President Clinton on September 30, 1993. The Executive Order requires OIRA to review all significant regulatory actions before the actions may take effect. The OIRA review period is generally 90 days, but may be extended. During the review period, OIRA will coordinate with and solicit comments from other agencies within the federal government to ensure that the actions are coordinated with the other agencies and do not introduce inconsistent, incompatible, or duplicative policies. The Executive Order also directs agencies to perform a cost and benefit analysis of the rules and provides that regulatory action may proceed only on the basis of a reasoned determination that the benefits of the agency action justify the costs.
After clearing OIRA review, the agency may then publish the final rule in the Federal Register. The final rule generally cannot become effective until at least 30 days after its publication in the Federal Register. The final rule also cannot adopt a provision if the agency did not clearly provide notice to the public in the NPRM that the agency was considering adopting the provision.
Congressional Oversight and Judicial Review of Federal Rulemaking
Congress and the courts, including the U.S. Supreme Court, play a role at the end of the rulemaking process, which may result in a rule being returned to an earlier point in the process or being vacated by the reviewing body. Congress may also play a role at other stages in the rulemaking process through its oversight and appropriations powers, potentially directing agency priorities or using the “power of the purse” to instruct agency actions.
Under the Congressional Review Act (“CRA”), for example, before any final rule can be effective, it must be filed with each house of Congress and the Government Accountability Office (“GAO”) along with any cost-benefit analysis prepared for the rule and other documents. For certain “major” rules, GAO provides Congress with a report on the rule assessing the rulemaking agency’s compliance with the procedural steps required by the various acts and executive orders applicable to the rulemaking process.
Within 60 days after Congress receives an agency’s rule (excluding periods when Congress is in recess or adjournment), Congress can pass a joint resolution of disapproval and nullify the rule, even if it has already gone into effect. Congressional disapproval under the CRA also prevents the issuing agency from propose to issue a substantially similar rule without subsequent statutory authorization.
The APA allows courts to hold unlawful and set aside agency actions in certain circumstances. The type of judicial review may differ depending on whether the court is reviewing formal or informal rulemakings. The most common standard of review that courts apply in challenges to agency rulemaking is the “arbitrary and capricious” standard, which is generally applied to informal rulemakings. The standard applies to factual determinations made during the notice-and-comment rulemaking process and is therefore largely a fact-based and situation-specific inquiry based upon the record of each particular rulemaking.
Section 45V Regulations
The Treasury and the IRS released the NPRM for Section 45V of the Code on December 22, 2023. The comment period for the NPRM expired on February 26, 2024. Treasury and the IRS will be currently reviewing the submitted comments and it is expected that some comments will get more attention than others. A public hearing is scheduled for March 25, 2024 in Washington, DC. The deadline for requests to speak and outlines of topics to be discussed was Monday March 4, 2024.
Treasury and the IRS will prepare a final form of the proposed Section 45V regulations after the public hearing. After the hearing and reviewing the almost 30,000 comment letters, the Treasury and IRS may ask for additional questions/comments before attempting to finalize the regulations or they may push ahead and prepare a final draft of the regulations for more senior level government review. There is no specific deadline for them to finalize the regulations. The proposed final regulation will need to be submitted to OIRA review as described above, which is typically 90 days, but that is not a hard deadline.
