Sean Rayford/AP Photo
An employee works in the battery assembly hall at the BMW Spartanburg plant in Greer, South Carolina, October 19, 2022.
Democrats’ Inflation Reduction Act, passed in August, is the United States’ biggest-ever investment in fighting climate change. Congress designed this legislation with an expansive vision for what a green economy should look like, funneling resources toward creating well-paying jobs in communities that may be hardest-hit by the transition away from fossil fuels.
But congressional intentions don’t implement themselves. The Treasury Department and IRS are about to issue regulations setting rules for the tax credits in the legislation. This technical exercise will have vast consequences for whether federal investments end up in the pockets of workers—or of Wall Street investors.
Of the Inflation Reduction Act’s estimated $369 billion in investments in combating climate change, a large majority—at least $270 billion—will take the form of forgone revenue through tax concessions. These include incentives for generating renewable electricity; credits for installing electric-vehicle charging stations, and deductions for building energy-efficient commercial buildings.
Because many of these tax credits are “uncapped”—they can be claimed by anyone who is eligible, without limit—many analysts think that these cost estimates by the Congressional Budget Office are dramatic underestimates. Total climate spending under the IRA could be upward of $800 billion, catalyzing $1.7 trillion in private investments in green technologies, according to analysts at the investment bank Credit Suisse.
This technical exercise will have vast consequences for whether federal investments end up in the pockets of workers—or of Wall Street investors.
Congress attached strings to these tax giveaways so that the forgone revenue enables good-quality jobs. To take full advantage of the incentives, companies must ensure that 10 to 15 percent of construction work is done by apprentices learning new skills, enabling them to find full-time work in that industry. And they must pay all laborers and mechanics minimum prevailing wages set by the Department of Labor—which are soon to be substantially raised through new DOL regulations. If companies don’t meet these high labor standards, they are only eligible for one-fifth of the tax credit or deduction.
Congress is also using tax credits to steer money toward U.S. manufacturing, and the communities hard-hit by the energy transition. Firms get extra tax credits if they use materials built in the United States to build green generation facilities. And companies generating renewable energy can reduce their taxes further if they site new power generation on brownfield sites or higher-unemployment areas reliant on extraction and burning of fossil fuels.
Collectively, these provisions represent a dramatic new vision for shared growth. The U.S. has always done industrial policy through the tax code. The fuel and R&D tax subsidies of yore, however, had no requirements for recipient companies to pay their workers a living wage.
But whether this new vision will be successful is uncertain. Its success rests on how the Treasury and IRS write the regulations implementing Congress’s plan. The agencies want to issue these regulations expeditiously, pointing to guidance issued the same day that the IRA was passed as a model.
These rules are urgently needed. But there are three major problems they will need to address.
First, the agencies need to tailor eligibility criteria narrowly so that green-energy tax credits don’t subsidize activities that don’t actually reduce emissions. One of the few bipartisan features of the Trump-era tax cuts was a set of tax incentives for investments in low-income “Opportunity Zones.” But the IRS rules for designating such eligible zones were far too lax; the resulting investments were highly concentrated in real estate construction in rich cities. In implementing the IRA tax credits, Treasury has enormous discretion to decide what kinds of electricity generation facilities count as zero-emission. The agencies have stated that they see “effective guardrails and reporting” as key to the implementation of these tax credits—but it is not yet clear what standards they will use to make these necessary determinations.
Second, the agencies need to make sure that companies claiming these tax credits actually meet the labor standards in the law. While there are penalties for failing to comply with these provisions, including pay restitution for workers, the IRS is dramatically underfunded, and it has limited capacity to audit companies suspected of cheating. Instead, the IRS needs to collect information at the time of tax filing about whether companies actually pay prevailing wages and hire the required apprentices.
Finally, the agencies need to help make these provisions visible to the broader public, rather than just the accountants who prepare companies’ tax returns. Political scientists have highlighted the importance of “policy feedback loops” to successful government programs: Policies that are known and understandable to their beneficiaries are more likely to mobilize coalitions to strengthen those policies. As it stands, workers who benefit from better pay or greater demand for U.S.-made steel as a result of these provisions are far removed from corporate accounting departments. No one could blame them for failing to see this vision for inclusive growth buried deep in the tax code.
The first problem is one for government lawyers. But the agencies should enlist workers and communities to address the issues of oversight and public awareness.
Regulators should create tools for workers to easily check whether they’re being paid prevailing wages, and to notify the IRS if they are not. They should collaborate with labor unions to build network ties between apprenticeship programs, making sure that a company can’t weasel out of the requirement via an exemption in the law if the company can’t find apprentices to hire on the first try. And they should reach out to local governments and community groups in eligible “energy zones,” getting them to spread the word of the expanded tax credit opportunity, such as by working with local households and businesses to install solar panels on their properties.
The Biden administration is eager to get these tax regulations out the door. They’re right to hurry: Many of the tax credits only go into effect 60 days after the rules are issued. But it is just as important to get the details right. The success of the green transition—and the broader democratic vision behind it—depends on it.
