The 725-page bill is marbled with political and union favoritism.
by The Wall Street Journal Editorial Board, August 3, 2022
West Virginia Sen. Joe Manchin last fall sharply and rightly criticized a bonus tax credit for union-made electric vehicles in the Build Back Better bill. “We shouldn’t use everyone’s tax dollars to pick winners and losers,” he said. Yet that’s exactly what his tax and climate deal with Senate Majority Leader Chuck Schumer does.
The 725-page bill is riddled with green goodies that favor unions and projects located in specific regions. Most tax credits for renewable energy projects are five times more generous if contractors pay “prevailing wages”—that is, union-scale wages—and employ workers participating in apprenticeship programs. These are usually run by unions.
The new base tax credit for solar and wind production would be $5.2 per megawatt hour (MWh), which is less than the existing $26 MWh subsidy. However, investors in projects that meet the bill’s labor specification would be able to claim $26 MWh and $28.6 MWh if 100% of their steel is made in the U.S. Didn’t President Biden antagonize steel-exporting Canada enough by canceling the Keystone XL pipeline?
Another example of union favoritism is the tax credit for carbon sequestration from manufacturing or fossil-fuel combustion. This credit is currently $35 per ton of CO2 captured and stored, which is about half the break-even cost for most projects. The Manchin-Schumer deal cuts the base credit to $17 per ton but increases it to $85 per ton for projects that meet its labor standards.
Manufacturers and fossil-fuel companies that hope to take advantage of the subsidy would effectively have to use union labor. Same for nuclear plants. The base $3 per MWh nuclear tax credit isn’t enough to keep plants afloat amid an onslaught of heavily subsidized renewable energy sources. But those that meet labor benchmarks can claim $15 per MWh and may stand a fighting chance.
One effect of all these bonus credits will be to raise project costs, which will be borne by utility ratepayers and taxpayers. They could also push up wages in local labor markets and raise costs for manufacturers and contractors that don’t benefit from government handouts, so public works, housing and goods could become more expensive. How does this reduce inflation?
The bill also increases renewable tax credits by an additional 10% to 20% for projects located in “environmental justice” communities—i.e., Democratic cities—and 10% for those in areas that have or had significant fossil-fuel employment. This is intended to compensate for the economic harm from the government’s force-fed green-energy transition.
But it will also distort capital allocation. Boone County, West Virginia, probably isn’t an ideal place to locate a solar farm, but investors may decide to locate one there in order to pocket more government handouts. Mr. Manchin no doubt expects his state to benefit from the corporate welfare and political direction of capital, but he shouldn’t be so sure it won’t end up as one of the losers.
Above all, the bill punishes companies and contractors whose workers aren’t unionized. It will also reduce the economic advantage of states like Arizona that have less unionized workforces and lower labor costs. They have worked hard to create a business-friendly climate that attracts private investment, including in green technologies.
The bill could also lead to short-term jobs in renewable construction replacing steady ones in fossil fuels. Has Mr. Manchin considered all of the bill’s potential economic consequences? He was right last fall when he said government shouldn’t pick winners and losers.