One Year Later: How Are the Inflation Reduction Act and Manufacturing Getting Along?
The Inflation Reduction Act (IRA) was signed into law on August 16, 2022, as a part of the Build Back Better framework. Over its short history, IRA has stimulated massive investments in battery and electric vehicle (EV) manufacturing across the country. Nearly 80 major clean energy manufacturing facilities have been announced—an investment equal to the previous 7 years combined, according to the American Clean Power Association.
Key provisions in the IRA that support manufacturing include:
- Nearly $400 billion for clean energy projects, to be delivered through tax incentives, grants, and loans
- The U.S. Department of Energy will receive about $12 billion to create a new loan program capped at $250 billion to improve energy infrastructure
- Private investment incentives—the majority of the $400 billion will be distributed in the form of tax credits, with about half going to corporations
“These credits are designed to catalyze private investment in clean energy, transportation, and manufacturing,” stated Justin Badlam, a member of McKinsey’s Public Sector Practice. “Many of the tax incentives are direct pay, meaning that an entity can claim the full amount even if its tax liability is less than the credit.”
Manufacturing facilities are only eligible for full IRA tax credits if they meet current wage and apprenticeship requirements, as well as some “made in America” percentages for materials, manufacturing, and assembly.
IRA funds will flow through more than a dozen federal agencies. “The U.S. Treasury Department is expected to handle the lion’s share—more than $250 billion—given the prevalence of tax credits in the law,” said Badlam. “The Departments of Agriculture and Energy, as well as the Environmental Protection Agency, will receive $120 billion combined to bolster climate, environmental justice, conservation, and resilience programs.”
The IRA does, however, encourage small business growth. It doubles the research and development tax credit to ensure pre-revenue businesses have access to up to $500,000 starting next year. In addition, it increases taxes on companies making over $1 billion in profits, while providing tax credits to companies that meet strict domestic sourcing rules—which ensure that more jobs stay in the U.S. instead of being offshored.
Clean Tech Benefits the Most
Clean-tech manufacturing and distribution sectors stand to benefit the most because the IRA contains new environment-related tax credits that specifically address these businesses.
“While manufacturers can directly benefit from the energy efficiency incentive under IRC section 179D, or clean energy generation and energy storage tax credits under the section 48 Investment Tax Credit, manufacturers with facilities where these eligible products and components are made can now also benefit from other tax credits that specifically incentivize the manufacturing of such products,” said Lee J. Peterson, a senior manager for CohnReznick, a business consulting firm.
This express focus on incentivizing specific types of manufacturing and industrial products with the federal tax code is significant. Thus, added Peterson, “the IRA not only provides an incentive for manufacturing clean tech equipment and components, but the law also contains other federal income tax credits for the cost of such manufacturing equipment.”
Speeding up Investment
Although there is an abundance of funding and investment opportunities, getting the tax credits to companies has been slow, according to Brandon Farris, vice president of Domestic Economic Policy at the National Association of Manufacturers (NAM).
“It is important to maintain momentum and streamline the permitting process to distribute these funds as quickly and efficiently as possible,” he said. “The IRA is driving investment interest, including by foreign companies that are eager to build facilities in the U.S. That’s why that we need to make sure that the permitting process is streamlined so that, as a country, we capture all these investment dollars.”
Farris noted that, especially in the clean energy sector, permitting issues are slowing down the disbursement of funds, delaying the starts of new projects. While the Treasury Department is “a little behind” in getting the guidance out for these tax credits, many companies are holding off on starting their projects until the Treasury Department finishes its guidance. “If a company is relying heavily on these tax credits, it does not want to go ahead with the project until it is sure the funding is secured,” said Farris.
This, of course, creates a bottleneck where companies are eager to build but waiting for the green light to move ahead.
Moving Clean Tech Forward
Although it has wide-reaching implications for healthcare and direct debt reduction, the IRA is heavily focused on improving the manufacturing infrastructure. “The act couldn’t have come at a better time, as the U.S. manufacturing industry is expected to have more than two million vacant jobs by 2030 and is struggling to keep up with already strained supply chains in a post-pandemic world,” said Denis Phares, CEO for Dragonfly Energy Corporation, a battery manufacturer.
Manufacturing is the backbone of American innovation. Thanks to the IRA and the valuable funding it provides, manufacturing is set for growth, noted Phares. “We are already seeing large companies, such as Toyota, Honda, Samsung, and LG, building manufacturing plants in the U.S. because of it,” he said. “Be sure to get the money you qualify for before it is gone.”
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