Unpacked   //   August 23, 2022

Unpacked: What the Inflation Reduction Act means for sustainability in retail

Sustainability experts in fashion and retail are cheering the United States’ latest move to combat climate change — even as big business interests stood steadfast against a tax increase that will affect large companies. The multi-pronged Inflation Reduction Act, signed by President Joe Biden, includes measures meant to help residents save on energy bills and health care plus several tax measures. But it also marks the largest investment in climate action taken by the United States government in its history, with a whopping $369 billion toward energy security and climate change initiatives.

The investment is estimated to help reduce carbon emissions by about 40% by 2030, and it’s doing so with a suite of incentives and tax credits affecting both consumers and manufacturers alike. Retail experts say the move could have a domino effect by increasing the popularity of goods like electric cars and efficient appliances while ushering in more domestic clean energy production.

But a main revenue-generating piece of the legislation is a new 15% minimum corporate tax, a move that is estimated to raise $222 billion in government funds aimed at reducing the national deficit.

Here’s a breakdown of provisions in the act that may affect how eco-minded retailers do business in these new conditions.

What are some of the consumer-facing sustainability initiatives in the Inflation Reduction Act?

A significant aspect of the legislation aims to cut down consumers’ energy costs. That includes $9 billion in rebate programs targeted toward low-income households to help them upgrade home appliances and undergo energy-efficient retrofits.

There are also 10 years’ worth of consumer tax credits aimed to help households offset costs for upgrades like heat pumps, rooftop solar, electric HVAC and water heaters. The Department of Energy estimates that the average American household spends $1,850 a year on home energy bills, but such investments can make it more affordable. The cost of a solar installation with the new tax credits, for example, will carry an average savings of 30% or more than $7,500.

On the transportation front, there are $4,000 in tax credits available for low-to-middle income individuals who buy a used clean vehicle, and $7,500 if they buy a new one.

Bill Koefoed, CFO of intelligence finance platform OneStream Software, said companies that are in the home and appliance market are likely to see boosts from the tax credits and rebates. To help companies prepare for changes that could come from the Inflation Reduction Act, OneStream is building forecasting models that anticipates what kind of suppliers, materials and other components they may need due to the influx in demand for energy-efficient products.

“It’s going to drive increased consumer purchases in these areas so it will mostly benefit auto companies, retailers like Home Depot or Lowe’s, and companies that make energy efficient products like windows, A/C, furnaces, heat pumps, etc,” he said.

How will these tax credits and rebates affect shopping habits?

Retailers are also hoping that the shift toward more sustainable energy products will bleed into other categories as consumers think about their carbon footprint. Carly Bigi, founder and CEO of Laws of Motion, a zero-inventory fashion company that uses AI technology to create made-to-order pieces with precise measurements, said she’s hoping the Inflation Reduction Act will have a big impact on consumer behavior.

“It’s priming sustainable buying behavior among consumers, and that’s going to be a catalyst for consumers to expect more from brands,” Bigi said.

Wolf & Badger’s co-founder and CEO, George Graham, operates an online marketplace of artisanal independent clothing and housewares, as well as several retail locations. He said that the demand for sustainably-made goods is on the rise, with year-over-year U.S. sales having grown 225% in the United States.

“We’ve found really strong demand for that higher quality, more sustainable, ethical type of product that’s different to what you would find in Main Street stores or in the big shopping sites or department stores.”

How will the act affect supply chains and the push for greener supply chains?

On top of the consumer-oriented sustainability benefits, the Inflation Reduction Act includes $60 billion to support clean energy manufacturing. That includes production tax credits for manufacturing technologies like solar panels, wind turbines and batteries — as well as a $10 billion investment tax credit targeted toward building new manufacturing facilities that will make electric vehicles or clean energy technologies.

Other provisions aim to cut down on emissions by offering grants and tax credits to go toward clean energy storage and clean commercial vehicles, as well as industrial manufacturing processes, like chemical plants.

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Graham from Wolf & Badger said that the tax credits can help encourage businesses to make decisions that are better for the environment that they otherwise wouldn’t be making. And he hopes that this is the beginning of more domestic production in the name of limiting greenhouse gas emissions.

“As the U.S. starts looking to reduce its overall greenhouse gas emissions and think about how changes to supply chains can help in that endeavor, I think we’ll see a shift back towards more consciousness around how things are produced,” he said.

Piyush Golia, president of distribution company The PCA Group, said that the overall focus on clean manufacturing could impact supply chains that have become largely outsourced, such as those in the beauty industry.

“With the intersection of supply chain concerns and emphasis on creating more manufacturing jobs, brands have the opportunity to utilize grants to set up plants here within the U.S. and not be so reliant on international supply chains,” he said.

What 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 the Joint Committee on Taxation and a review by the Congressional Research Service.

Business interests like the U.S. Chamber of Commerce and the National Retail Federation opposed the measure. NRF’s senior director of media relations Danielle Inman said in an email that fighting off the tax was “a top priority” during this session of Congress, though she did not share further specifics.

“Retailers are generally unaffected by the new corporate minimum tax proposal because most already pay at much higher effective rates than 15 percent,” she told Modern Retail in an email.

The organization has historically opposed other corporate tax increases, too, citing the impact on job creation.

But “relatively few” companies are likely to be affected: about 150 tax-paying corporations will be getting hit with the new bill, CRS found.

That’s because the minimum tax is only going to apply to businesses with $1 billion or more in average annual earnings, based on a three-year period. There are multiple exceptions, including S-corps, real estate investment trusts and regulated investment companies like mutual funds. But around half of the companies likely to be affected are in manufacturing, and about 11% are in information and holding companies. Some companies will be allowed to use credits to offset the tax, according to the Congressional Research Service.

Overall, the tax increase is adding less than 5% in projected corporate tax revenues.

“Based on projections of [4.8 trillion] in corporate revenues for FY2023-FY2032 by the Congressional Budget Office, the $222 billion revenue projection indicates an increase in corporate tax revenues of 4.7%,” CRS wrote.