The goals of the Inflation Reduction Act (IRA) of 2022, signed into law in August 2022, are many, including cutting costs for American families and senior citizens, fighting climate change, supporting clean energy advances and increasing domestic manufacturing jobs related to clean energy, and reducing healthcare costs.

For a majority of the 20th century, manufacturing was the main driver of American economics, and subsequently, middle-class incomes. However, the first decade of the 21st century marked a dramatic drop in domestic manufacturing jobs. Employment in manufacturing, which had remained relatively steady since 1965 at about 17 million jobs, declined by a third from 2000-2010 to below 12 million jobs. While the job losses can be attributed to many causes, the biggest factor was offshoring.

Offshoring occurs mainly due to two influences, tradability and labor cost. Tradability is a property of a good or service that makes it sellable in a location distant from where it is produced. It is primarily determined by two factors, the cost of transportation and the product’s lifecycle. The late 1990s and the decade of the 2000s saw a substantial increase in the availability of low-cost container shipping and international air cargo, which served both to reduce the cost of transportation and accommodate more products with shorter lifecycles.

The cost of labor also contributed substantially to offshoring. In the early 2000s, as the offshoring boom began, the cost of labor in China was as little as one-tenth or less of the cost of American labor. The transition to lower cost manufacturing required certain start-up costs, like setting up a factory in China, hiring and training Chinese workers, and setting up the supply chain needed for those manufactured products to be transported to the U.S. But those expenses were easily covered by the savings delivered by reduced production costs.

The IRA aims to reverse the trend through a wide range of incentives, such as tax credits and grants, designed to create clean energy manufacturing jobs in the U.S. as well as sustain existing manufacturing jobs. For example, the Advanced Manufacturing Production Tax Credit (45X MPTC) is a per-unit tax credit for clean energy items domestically produced and sold by a manufacturer, thus addressing two of the IRA’s goals: fighting climate change and growing the U.S. manufacturing sector.

The New Clean Electricity Production Tax Credit (45Y), which will replace the Electricity Production Tax Credit when it phases out in 2024, offers a 1.5 cents credit per kilowatt hour of electricity produced and sold or stored at facilities placed into service after 2024 with zero or net negative greenhouse gas emissions. Unlike the 45X MPTC, the Electricity Production Tax Credit does not require the production to be domestic; it does, however, offer a 10 percent bonus for meeting domestic manufacturing requirements for inclusion of steel, iron, and other manufactured components.

While many of the new credits associated with the IRA are geared toward cleaner energy, they also offer incentives, sometimes tied to requirements, for manufacturing companies to hire their production teams and keep their production in the U.S.

Auto manufacturing in particular will be heavily impacted by the IRA, mainly due to incentives to produce electric vehicles. Industry trends are already being influenced by the IRA. For example, General Motors is investing $45 million into expanding its aluminum die-casting foundry in Bedford, Indiana to feed two metro Detroit assembly plants that will manufacture electric vehicles. Hyundai also plans to construct a $5.5 billion-dollar electronic vehicle factory in Bryan County, Georgia. The state’s largest-ever economic development project will create an estimated 8,100-plus factory jobs.

Overall, the IRA contains $500 billion in new spending and tax breaks, making it one of the most economically impactful pieces of American legislation ever passed. U.S. manufacturers need to take heed of the provisions to understand their opportunities relative to the numerous incentives geared toward advancing clean energy initiatives and creating domestic manufacturing jobs. With many of its incentives requiring domestic production, manufacturers might find it more cost-effective to base their production teams in the U.S., thus reviving the industry that was responsible for elevating the American economy a century ago.

To discuss opportunities the Inflation Reduction Act could offer you and your business, contact a member of HBK Manufacturing Solutions at 330-758-8613 or manufacturing@hbkcpa.com.