One year after the Inflation Reduction Act (IRA) was passed, there is evidence of an increase in construction investments, job creation in certain sectors, and investments in future clean energy projects. Historically, sustainable building has been expensive and cost prohibitive for many developers and owners. The IRA, through various tax incentives, aims to make clean energy more accessible and financially viable for construction contractors and other stakeholders.
Overview of the Inflation Reduction Act
The Inflation Reduction Act, acknowledged as one of the most extensive climate bills in American history, became law a year ago, marking a significant shift in the country’s approach to energy and environmental policies. With over $300 billion in new and modified tax incentives, the IRA was specifically designed to fortify clean energy and energy efficiency investments across the United States.
Notable IRA tax changes included a new corporate alternative minimum tax, new corporate excise tax on stock repurchases, health care tax subsidies, and increased funding for the IRS.
The legislation included $270 billion in tax credits allocated to renewable energy construction projects, covering solar, wind, hydrogen, and electric vehicle infrastructure. Additionally, it provided 22 tax credits aimed at advancing low- or zero-emission technologies across utility-level electricity, transportation, commercial and residential buildings, and industrial sectors.
In reaction, private companies channeled over $86 billion into 210 confirmed clean energy and electric vehicle projects.
Tax and Economic Perspective
The IRA set ambitious economic goals, yet its outcomes have yielded mixed results. Initially intended to curb deficits and inflation, reports from the Joint Committee on Taxation point to a potential surge in deficits, mainly due to soaring costs linked to green energy credits. Additionally, significant revenue raisers like the book minimum tax and stock buyback tax are temporarily on hold, complicating fiscal projections.
Conversely, the Act’s emphasis on subsidizing green energy shows promise for the economy. The rise in associated tax credit costs mirrors a notable surge in investment in environmentally friendly technologies, especially in electric vehicles and renewable energy sources like solar and wind power. Notably, solar and wind power surpassed coal for U.S. power generation in the first five months of the year, signaling a shift toward cleaner energy sources, according to the Energy Information Administration.
While the White House celebrates the creation of over 170,000 clean energy manufacturing jobs and projects an additional 1.5 million jobs over the next decade, concerns have emerged. The Associated Builders and Contractors (ABC) has taken legal action on new labor policies related to the Davis-Bacon Act within the IRA. Additionally, an October 2023 survey showed that 98% of ABC contractor members felt that prevailing wage and apprenticeship policies mandated by the IRA might deter them from bidding on clean energy projects. This sentiment was particularly strong among small businesses.
The IRA’s impact on deficits, investment, and broader economic shifts requires comprehensive evaluation, further scrutiny, and understanding within our multifaceted economic landscape.
A complete list of IRA tax credits and tax planning changes related to energy can be found in our article here.
Construction Industry Impact
The IRA presents opportunities for the construction industry by fostering substantial investments and employment opportunities. But growth will not be without challenges.
Total construction spending reached $1.98 trillion in August 2023, rising by 7.4 percent from the previous year. Nonresidential construction surged by 17.6 percent while residential construction faced a 3 percent decline. Manufacturing construction saw the most substantial increase at 65.5 percent, signifying significant investment in this sector.
The construction industry experienced a notable boost in employment. An in-depth analysis forecasts the creation of 303,500 construction jobs annually over a standard five-year construction phase. An additional 99,600 yearly construction jobs are expected to support long-term operations. However, challenges remain due to persistent labor shortages and slow recovery to pre-pandemic job opening rates.
The IRA introduced tax credits for clean energy infrastructure, including renewable energy and electric transmission facilities, alongside revised deductions (Section 179D) for energy-efficient retrofits. Reports mark a 12 percent boost in commercial solar adoption and increased retrofit activities involving wind, solar, and batteries. While linking the IRA directly to new housing construction is complex, Commerce Department reports note a rise in permits for future single-family homebuilding.
Other ways that the IRA will continue to impact the construction industry include:
- Updating state and local building codes
- Making it more cost effective to improve building materials
- Increasing demand for green buildings
One analysis estimates that the IRA could lead to 2.4 million electrification upgrades in low-income communities, 1.2 million home energy retrofits, 650,000 new energy efficient homes, among other areas of increased demand.
Challenges implementing the IRA largely focus on compliance with prevailing wages, apprenticeship standards, and domestic content mandates. IRA policies raise the bar for compliance within the federal tax code for many construction projects, carrying substantial penalties for non-compliance.
The construction industry is set for growth, particularly in healthcare, hotels, education, and manufacturing. Infrastructure and cutting emissions will continue to be priorities. These focus areas are largely supported by substantial funding from various pieces of legislation, including the CHIPS Act and IRA. Getting enough skilled workers to fill job openings will be critical in the years ahead.
The IRA’s continued influence suggests a potential transformation within the construction industry, marked by investments, job creation, and a shift toward renewable energy. While initial impacts present substantial opportunities, continued evaluation remains crucial to fully understand its influence on industry growth and long-term sustainability.
For specific inquiries about the Inflation Reduction Act going forward, clients can reach out to Jennifer French, Team Leader of PBMares’ Construction & Real Estate practice.