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Will the Inflation Reduction Act Impact Construction and Real Estate?

October 24, 2022

The Inflation Reduction Act of 2022 has provisions in it that could have an indirect impact on the construction and real estate market in the US, the question is: to what degree? The Act has main provisions in it that:

  • Reduce prescription drug prices for Medicare recipients.
  • Extend the Affordable Care Act Subsidy through 2025.
  • Invest in energy security and climate change initiatives.

The Act will generate revenue to offset spending by:

  • Creating a minimum 15% corporate tax rates for companies with at least a billion in income.  Stock buybacks will face a 1% excise tax.
  • Investing $80 billion over the next 10 years to enforce tax collections.

Scores on the bill show that it will have negligible impact on macroeconomic inflation. The CBO found that it could reduce inflation by one-tenth of a percent. However, it is estimated to reduce the deficit by $100 billion over the next decade, roughly 4% of the $2.8 trillion deficit recorded by the US in 2021.

Construction and Real Estate Impacts

The areas of the bill that could have an impact on construction and real estate are buried and will likely carry two different outcomes (one incentivizes and the other tightens via taxation) which may or may not help with net new activity.

First, it will provide incentives for companies to invest in manufacturing in the US. There are provisions for tax breaks for new clean manufacturing technologies to be deployed in the US, and stipulations in the act would force companies to largely use materials that meet “Made in the USA” composition requirements in order to benefit from those incentives. In theory this will boost domestic manufacturing activity. That increase in American manufacturing would push investments into real estate and construction activity to expand domestic manufacturing capacity.

Projects emanating out of the energy security and climate change initiatives could also boost construction and real estate activity. Here are areas where some of the investment could result in direct impacts:

  • $60 billion allocated to encourage manufacturing of solar panels, batteries, and other clean energy technologies in the US.
  • Expands clean energy tax credits by ten years.
  • $7 billion in investments for electric postal service vehicles, clean school and transit buses, garbage trucks, and zero emissions equipment at US ports. Many of these will have "Made in the USA" provision impacts, which will expand demand for US product manufacturing.
  • $7,500 incentive for purchasing an electric vehicle (one that qualifies) could boost more domestic automotive manufacturing.

As mentioned, there is a secondary factor that could limit the volume of new manufacturing projects started in the US. What analysts are having a difficult time understanding is how the minimum tax rate of 15% may or may not impact investments into US manufacturing. Although the minimum tax is limited to companies making more than $1 billion in revenue, a significant portion of the reshoring activity that was taking place was within firms that meet that stipulation. A percentage of those firms will have already been meeting the 15% minimum tax threshold, but it could provide a disincentive for some firms to reshore. The fact is, at this stage, nobody really understands just how big of a role that might play in reducing the full impact of the Inflation Reduction Act. It could be negligible, or it could slow down the full impact of those incentives being utilized and carry with it no significant benefit.

There are many other provisions in the act that could reduce the amount of real estate that could be developed (through key habitat protections, restoring coastal ecosystems, and other measures), but most bipartisan analysis believes these impacts to be minimal on the broader commercial real estate sector, especially in the Kansas City area.

The details of how this bill will ultimately impact the US is still being explored, and it could take a full tax cycle to understand how many of the benefits in the bill are being utilized. If you have any questions on how this might impact your business, please reach out to your MarksNelson advisor.