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What Does the IRS Have To Do With Labor?

Here’s how a new tax rule is advancing climate action and worker rights.

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IRA Implementation

Thursday, August 08, 2024

Audience cheering at President Biden's speech about creating union jobs in Illinois.

Americans know the Internal Revenue Service (IRS) best as the government body that collects their taxes every year, but a few key provisions of the Inflation Reduction Act (IRA) also gave the agency a vital role in the clean energy transition. Because of how the IRA’s clean energy tax credits are structured, IRS is implementing the most powerful tool we have for ensuring federal climate investments create good clean energy jobs.

Congress had directed the IRS to implement pro-worker standards for clean energy tax credits, but the agency needed to put these protections into place with force. And recently, the Biden-Harris IRS delivered. The agency released highly anticipated final guidance for these IRA tax credits, which provides serious teeth to enforce labor standards detailed in the statute. In a major win for workers, the guidance operationalizes two IRA provisions that heavily incentivize paying good wages and hiring apprentices on clean energy projects.

While the original legislation provided for those incentives, IRS still needed to define how to implement them; the IRA’s potential to create good union jobs in clean energy sectors depended on how the agency approached this rulemaking. Labor standards are only as good as their enforcement, and IRS successfully met the mark by putting strong guidelines in place.

The agency’s rigorous guidance earned kudos from North America’s Building Trades Unions (NABTU), a major labor organization representing more than a dozen unions. NABTU President Sean McGarvey called IRS’s action “another obvious example of the Biden-Harris administration’s rock-solid commitment to the working families of the construction industry.” The final rule applies significant penalties for noncompliance, expansively defines the projects for which apprentices are required, and more.

Wide shot of a large crowd listening to Biden deliver remarks at a NABTU conference. — The North America’s Building Trades Unions (NABTU) Legislative Conference. NABTU represents more than a dozen unions and gave kudos to the IRS' pro-worker standards.

The IRS rule puts a central plank of the good clean energy jobs agenda into place. The labor incentives it regulates apply to twelve major clean energy tax credits, covering everything from utility-scale solar to electric vehicle chargers. An analysis commissioned by the BlueGreen Alliance found that these credits would collectively create more than 2.3 million jobs, and Credit Suisse projects that just four of those credits would deliver $326 billion of investments before factoring in additional labor and siting incentives.

Ultimately, the IRS’s guidance means the bulk of those jobs will be subject to rigorously enforced labor standards, and hundreds of billions of dollars will help create climate and clean energy jobs. That’s a huge win for workers across the country.

What Do Labor Standards Have to Do With Climate Action?

Creating good jobs in the clean energy transition is an economic, political, and ethical imperative. The clean energy transition is an economic transformation on the scale of the Industrial Revolution. As we undertake the mammoth task of moving the world away from fossil fuels, we must seize the simultaneous opportunity to strengthen the American economy by undoing the harms of policies that prioritize profits over people, rebuilding a strong middle class, and reinvigorating disinvested communities.

Leveraging climate policy to usher in a new era for organized labor would help close the racial wealth gap, improve public health outcomes, and build a more resilient national economy. Investing in working families through climate action will also create strong political support for the clean energy transition. And beyond economic and political realities, we must also recognize a clear, collective responsibility to build a more just economy that prioritizes workers over corporate profits.

What High-Road Labor Standards Are Included in the IRS’s New Law?

By incentivizing high-road labor practices, the IRA’s clean energy tax credits make significant progress on climate action for jobs and justice. The law applies both Prevailing Wage and Apprenticeship (PWA) incentives to ten major credits, including some of the highest-impact provisions in the climate package. Through those credits, the federal government effectively reimburses developers for some amount of the cost of building or operating new clean energy projects. The IRA’s labor incentives dramatically boost the size of that reimbursement—in general, a taxpayer who meets the PWA standards will see their credit value quintupled.. It’s a win-win for workers and employers, proving that profits and strong labor standards can go hand-in-hand in the clean energy economy.

For example, the clean energy investment tax credit for a project that doesn’t meet PWA standards is worth 6 percent of project cost; the credit for a project that does meet PWA standards is worth a whopping 30 percent of project cost. The incentives are so robust that it’s hard to imagine a given project developer opting out of receiving the full credit amount—especially in industries where labor costs are only about 10-20 percent of the full project cost.

Prevailing Wage

The covered IRA tax credits require meeting the prevailing wage requirement in order to get the full credit value. Tying the full credit value to PWA standards, as pioneered in Washington by the Clean Energy Transformation Act signed by Washington Governor Jay Inslee in 2019, is a powerful force for good jobs in the clean energy economy. For the IRA’s tax credits, meeting the prevailing wage requirement means that all workers handling construction, alteration, and repair for a certain time period must be paid no less than the prevailing wage. The U.S. Department of Labor (DOL) establishes prevailing wage rates by county and for each classification of worker based on survey data it collects from construction projects in the area. Prevailing wages therefore prevent the erosion of local wages and benefits and ensure that clean energy workers are paid a fair wage.

Apprenticeships

The apprenticeship requirement further calls for 15 percent of construction labor hours for each clean power project to be performed by an apprentice. Apprenticeships are a critical pathway into good union jobs, and this stipulation will help build a durable workforce with a new generation of well-trained clean energy workers. By increasing the number of union apprentices working on clean energy projects, the apprenticeship provision will also indirectly boost union membership in years to come.

These stipulations are all laid out in the IRA statute; after the law passed, IRS was tasked with figuring out how to implement and enforce them. In its recent rulemaking, the agency effectively finalized its plan for doing so. Its guidance goes a long way toward ensuring these incentives will have their intended impact on creating good jobs in the clean energy transition.

Vice President Kamala Harris meets with labor leaders in her office at the White House. — Vice President Harris meets with emerging labor leaders. The Biden-Harris administration's IRA labor incentives will help rebuild middle class communities across the country.

Why Does This IRS Rule Matter?

The stakes were high for the PWA rulemaking, which built the framework for putting these historic incentives into practice. Enforcement is the backbone of labor standards: An ambitious program with lax administration and no real teeth to prevent fraud is, for workers confronting illegal labor practices, worth little more than the paper it’s written on. In a country where more than 2.1 million construction workers suffer abusive labor practices and the federal government spends 12 times more to enforce immigration laws than it does to enforce labor laws, strong worker protections for the IRA’s labor incentives were critical.

Carrots: Rigorous Standards to Define the “Good Faith Effort”

The IRS’s final regulations rightly implemented the pro-labor intent Congress expressed in the IRA text and rejected erroneous readings that might have allowed project developers to take a full credit without actually meeting the IRA’s standards. For example, the IRA waives the apprenticeship requirement for developers who undertook a “good faith effort” to recruit apprentices—but what constitutes a “good faith effort” needed to be defined consistent with the IRA’s purposes.

The IRS’s final regulations apply rigorous standards to define the “good faith effort,” including robust requirements around the level of detail included in developer communications with apprenticeship programs and an expiration date on the exemption, meaning an exempted developer must periodically seek again to hire apprentices if at first unable to do so.

Sticks: Penalties for Noncompliance and Enforcement Mechanisms

The IRA text stipulates that penalties for noncompliance increase in cases where developers exhibit “intentional disregard” for PWA requirements. The final rule imposes high standards on project developers to ensure compliance, like factoring in whether the taxpayer filing for the credit regularly reviewed payroll records from contractors and subcontractors.

Backing up these stringent requirements, IRS included significant enforcement mechanisms and penalties in the final rule. To ensure effective enforcement and education for developers seeking to comply with the new standards, the agency will sign a Memorandum of Understanding with the Department of Labor (DOL). DOL will contribute its considerable experience enforcing labor standards, assessing prevailing wages, and overseeing registered apprenticeship programs. Per the IRA statute, when developers seeking the credit are found noncompliant, the penalties assessed will also be substantial. For failing to meet prevailing wage requirements, for example, the taxpayer must make up the underpaid wages plus interest to the affected workers and make a penalty payment to IRS.

We should not take these strong worker protections for granted. The U.S. has a long history of favoring corporate profits over workers’ interests, and labor abuses frequently go unchecked. Wage theft costs U.S. workers more than $50 billion each year—more than all robberies, burglaries, and motor vehicle thefts combined. The IRS’s rulemaking faithfully interprets the IRA’s powerful pro-worker climate policy, and represents a landmark moment in the fight for worker protections at the highest levels of government.

What Does This Mean for the Clean Energy Transition?

Ultimately, the IRS’s rulemaking advances two major priorities: securing good union jobs in the clean energy transition and combating corporate greed and malfeasance. Clean energy jobs are not guaranteed to be good jobs. As we saw during the United Auto Workers' fall 2023 strike, the labor and climate movements will often have to advocate for high-road labor practices in emerging clean energy industries. This rule brings IRS into the fight as Congress intended, establishing a powerful ally in the effort to realize the IRA’s full potential to create good union jobs in communities across the country.

A broad array of stakeholders shaped this rulemaking, including a coalition of 14 attorneys general who advocated for strong enforcement measures. But much of the credit for this achievement is owed to workers, themselves, who advocated relentlessly for a strong final rule. NABTU and countless other unions, councils, and workers submitted hundreds of pages of public comments on the proposed rule and worked behind the scenes to secure a strong final rulemaking. Unions are a powerful force for racial and economic justice, and their engagement has ensured that a critical piece of the IRA’s good job creation engine now falls into place. The IRA’s labor incentives will enable investments in rebuilding the middle class in communities across the country. With this rulemaking, we know they’ll achieve their full potential.

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