Inflation Reduction Act (IRA) Wage and Apprenticeship Requirements: Effect on Tax Credit Values

The Inflation Reduction Act of 2022 (P.L. 117-169; IRA) created or modified 21 tax provisions subsidizing the use of “clean” energy. These benefits targeted taxpayers who purchase electric vehicles, produce fuels with low greenhouse gas emissions, make energy-efficiency upgrades to buildings, and engage in other activities potentially resulting in lower fossil fuel consumption. Low-emission energy sources such as wind, solar, and nuclear often have high fixed costs and low operational costs. Similarly, consumers pay a certain amount up front for energy-efficiency upgrades to buildings and benefit from lower energy bills thereafter. To reduce these high fixed costs and thereby increase energy efficiency and clean-energy consumption, the IRA tax credits and deductions subsidize the construction, alteration, or repair of certain energy infrastructure. The credits and deductions are accompanied by prevailing wage and registered apprenticeship (PWA) requirements that increase the generosity of the credits or deductions five-fold. (Although these rules are referred to as “requirements,” they can be thought of as requirements to receive a larger credit or deduction rather than as requirements to qualify for a credit or deduction.) The prevailing wage requirements stipulate that laborers and mechanics involved in the construction, alteration, or repair of facilities, projects, property, and equipment (FPPE) must be paid at least the average wage of workers performing similar work in the same locality. The registered apprenticeship requirements stipulate that registered apprentices must supply at least 12.5% or 15% (depending on when the given facility began construction) of the labor hours associated with constructing, altering, or repairing FPPEs used to claim an IRA tax benefit. Under the good faith effort exception, firms are deemed to have met the apprenticeship requirements if they request apprentices from a registered apprenticeship program and either do not receive a response within five business days or are denied for reasons other than their refusal to comply with the requirements. The good faith effort exception may limit the impact of the apprenticeship requirements. Table 2 describes the 12 IRA tax provisions that include PWA requirements, and contrasts the value of tax credits or deductions for firms meeting the PWA requirements with firms not meeting PWA requirements. Tax credit or deduction values are generally five times as large for firms meeting PWA requirements as for firms not meeting the requirements. For example, various tax credits are equivalent to 6% of applicable investment costs for firms not meeting PWA requirements and to 30% for firms meeting PWA requirements. Tax credit bonuses are also sometimes increased five-fold, though this is not true of every bonus credit.