A key revenue-generating law, however, is a new minimum corporate income tax rate of 15%, a move expected to raise $222 billion in state funds to help bridge the federal deficit.
Here’s a breakdown of the provisions of the law that could impact the business of environmentally conscious retailers in these new circumstances.
What are some of the consumer-focused sustainability initiatives in the Inflation Reduction Act?
An important aspect of the law is to reduce consumers’ energy bills. This includes $9 billion in rebate programs targeted at low-income households to help them upgrade appliances and make energy-efficient retrofits.
There are also 10-year excise tax credits designed to help offset the cost of home improvements such as heat pumps, rooftop solar panels, electric air conditioning and water heaters. The Department of Energy estimates that the average American household spends $1,850 annually on energy bills, but such investments can make it more affordable. For example, solar installation costs would save an average of 30%, or more than $7,500, with the new tax credit.
On the transportation front, $4,000 in tax credits are available to low- to middle-income individuals who buy a clean used vehicle, and $7,500 if they buy a new one.
Companies operating in the home and appliance markets are likely to get a boost from tax credits and exemptions, said Bill Kofoed, CFO of market research finance platform OneStream Software. To help companies prepare for the changes brought about by the Inflation Reduction Act, OneStream creates predictive models that predict what types of suppliers, materials and other components may be required.
“It’s going to lead to increased consumer buying in those areas, so it’s going to drive most auto companies, retailers like Home Depot or Lowe’s, and companies that make energy-efficient products like windows, air conditioners, stoves, heat pumps, etc. will benefit,” he said he. ,
How will these tax credits and exemptions affect shopping behavior?
Retailers are also hoping that the shift to more sustainable energy products will flow into other categories as consumers think about their carbon footprint. Carly Biggie, founder and CEO of Law of Motion, a non-stock fashion company that uses AI technology to create made-to-order pieces with precise measurements, said she expects inflation to ease. The law will have a significant impact on consumer behavior.
“It’s sustainable consumer buying behavior and it will be a catalyst for consumers to expect more from brands,” Biggie said.
Wolf & Badger co-founder and CEO George Graham operates an online marketplace for handmade independent clothing and home goods, as well as several retail outlets. Demand for sustainably manufactured goods is increasing, with U.S. sales up 225% year over year in the United States, he said.
“We’ve seen a really strong demand for higher quality, more sustainable and ethical products that you can find in Main Street stores or in the big malls or department stores.”
How will the law affect supply chains and the pressure for green supply chains?
In addition to consumer-focused sustainability benefits, the Inflation Reduction Act earmarks $60 billion to support clean energy generation. These include production tax credits for manufacturing technologies like solar panels, wind turbines and batteries — as well as a $10 billion investment tax credit aimed at building new manufacturing facilities that make electric vehicles or clean energy technologies.
Other regulations aim to reduce emissions by offering grants and tax credits for clean energy storage and clean commercial vehicles, as well as industrial manufacturing processes such as chemical plants.
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Wolf & Badger’s Graham said tax credits can help encourage companies to make choices that are better for the environment than they might otherwise not be making. And he hopes this is the start of more domestic production in the name of curbing greenhouse gas emissions.
“As the US begins to reduce its overall greenhouse gas emissions and consider how changes in the supply chain can help with that, I think we’re going to see a shift toward greater awareness of how things are produced, let’s see,” said he.
Piyush Golia, president of distribution company PCA Group, said the general focus on clean manufacturing could impact supply chains that have been largely outsourced, such as in the beauty industry.
He added, “With a focus on overlapping supply chain concerns and creating more manufacturing jobs, brands have an opportunity to use grants to build plants in the US and not be as dependent on international supply chains,” they said.
Which companies will be affected by the new 15% tax increase?
The 15% minimum corporate tax included in the Inflation Reduction Act could generate about $222 billion in new federal revenue over 10 years, according to a review by the Joint Committee on Taxation and the Congressional Research Service.
Business interests such as the US Chamber of Commerce and the National Retail Federation opposed the measure. Danielle Inman, NRF’s senior director of media relations, said in an email that fighting the tax was “the top priority” during this congressional session, although she gave no further details.
“Retailers are generally unaffected by the new business minimum tax proposal, as most are already paying effective rates above 15 percent,” she told Modern Retail in an email.
The organization has also opposed other corporate tax hikes in the past, citing the impact on job creation.
However, “relatively few” companies are likely to be affected: the CRS found that around 150 tax-paying companies are affected by the new draft law.
That’s because the minimum tax will only apply to companies with average annual income of $1 billion or more based on a three-year period. There are many exceptions, including regulated investment companies such as S-Corps, real estate investment trusts, and mutual funds. But of the companies likely to be affected, about half are in manufacturing and about 11% are in information and holding companies. According to the Congressional Research Service, some companies are allowed to use the credit to offset taxes.
Overall, the tax increase increases projected corporate tax revenues by less than 5%.
“Based on estimates by” [4.8 trillion] For corporate revenue for fiscal years 2023 through 2032, the Congressional Budget Office revenue estimate of $222 billion suggests a 4.7% increase in corporate income tax revenue,” the CRS wrote.